Applicability of GST on ROYALTY paid to the Govt. for MINING Lease

This is my personal view extracted from various study materials and case laws.

First, GST should not be levied on Royalty paid for Mining Lease, as Royalty paid on mining operations is itself in the nature of tax, so there cannot be levy of tax on tax. As in the leading case of STATE OF TAMIL NADU AND ANOTHER VERSUS INDIA CEMENTS LTD. AND ANOTHER  [2011 (4) TMI 1080 - SUPREME COURT] , the Hon’ble Supreme Court considered this issue whether royalty paid on mineral operations is a tax or not in order to examine authority of State to levy cess on royalty. The Supreme Court here had held the opinion that royalty is a tax and its payment is for the user of the land. The judgment had relied on a concept that royalty, in as much as some intrinsic economic value, is attributed to the extracted mineral created due to interaction among land, capital and labour, each of which possesses some definite intrinsic economic value. In this sense royalty was viewed as a kind of tax linked either directly or indirectly to the intrinsic economic value of a mineral realized through sale by the lessee

Second, if, GST is levied on Royalty paid for Mining Lease, then it should come under “Supply of Goods” instead of “Supply of Services”, as this is charge payable to the Government in respect of the ore or mineral excavated, consumed or removed from the mines and the applicable rate of GST should be at the same rate of tax as applicable on supply of like goods involving transfer of title in goods i.e., minerals/ stone boulders i.e. @5% instead of 18%.

It is viewed on the basis of the observation that, if the mines are not in operation, then Dead Rent is paid to the Govt. based on the area of mines given on lease by the Govt. to the lessee, whereas when the mines are in operation then, Royalty is paid instead of Dead Rent and Royalty is based on quantity of minerals extracted and removed from the mines. Royalty does not take place unless and until mines are in operation and minerals are extracted and removed from the mines.

As per Section 2(xliv) of the Rajasthan Minor Mineral Concession Rules, “Royalty” means the charge payable to the Government in respect of the ore or mineral excavated, consumed or removed from any land granted under these rules as specified in Schedule II.

Further, Section 9 of the Mines and Minerals Development and Regulation (MMDR) Act, 1957 also clearly stipulates that the holder of a mining lease notwithstanding anything contained in the instrument of lease or in any law in force is supposed to pay royalty in respect of any mineral removed or consumed by him or by his agent, manager, employee, contractor or sub-lessee from the leased area at the rate the time being specified in the second schedule in respect of that material.

Going by the plain reading of the text in the above explanations stated in the laws, it clearly positions royalty as a charge not on the service but upon the minerals or ores excavated from the land granted by the Government, which suggests that it is a charge against supply of goods and not services.

Any comments on the above shall be appreciated.

Author

CA ANAND MOHAN SINGH