Taxable service in relation to mining of Mineral, Oil or Gas – analysis

Relevant links and references:

Finance Act 1994- Section 65(105)(zzzy)

Notification No. 1/2006 ST dated 1-3-2006.  - Effective Rate of duty 

Notification no. 12/2003 dated 20-6-2003, exemption to the material sold. 

D.O.F. No. 334/1/2007-TRU. Dated 28-02-2007- Instruction to the department 

What is taxable - 65(105)(zzzy)

Any services provided or to be provided to any person, by any other person in relation to mining of mineral, oil or gas;

Analysis:

Wider scope of taxable service:

As noted above in analysis and remarks, the scope of service has been widened to cover any service in relation to mining or mineral, oil  or gas. What is required is that the service should be in relation to mining of mineral, oil or gas and service can be of any type. When the expression 'in relation to' is used, the expression shall cover all direct and indirect services.

Who is liable to pay service tax:

Any  person who is providing taxable service is liable to pay service tax. (This can be subject to exception in  cases of reverse charge in case of a service importer, if applicable in any case).

Effective date:

This service was made taxable w.e.f. 01-06-2007.

Service tax burden:

Although under law service provider is generally liable to pay service tax, however, the receiver of  service is usually required to pay service tax in addition to agreed consideration fro service. Therefore, usually  monetary burden  of such taxes is on the buyer of goods or service. When CENVAT credit is availed, the burden of service tax paid on input service is  not pressing hard because in that case the liability to deposit Central Excise or Service tax get reduced. Therefore, the burden is only about interest during period of service tax paid on input service and CENVAT availed subsequently  and other  administrative cost. However, when CENVAT credit cannot be availed, the burden on taxes on input material and services is greater. In case of mining, the burden will be high in most of cases particularly when there is no manufacture of excisable goods or rendering of taxable services.

Widened service:

As noted above in analysis and remarks, the scope of service was widened to cover any service in relation to mining or mineral, oil  or gas. This was also reflected and clarified in the Circular vide D.O.F. No. 334/1/2007-TRU, salient aspects of which are highlighted  below.

             6.2 MINING SERVICE [section 65(105)(zzzy)]: Presently, geological, geophysical or other prospecting, surface or sub-surface surveying or map-making services relating to location or exploration of deposits of mineral, oil or gas are leviable to service tax under 'survey and exploration of mineral service' [section 65(105)(zzv)]. Services such as-

• site formation and clearance, and excavation and earth moving, drilling wells for production / exploitation of hydrocarbons (development drilling)

• well testing and analysis services

• sub-contracted services such as deploying workers and machinery for extraction / breaking of rocks into stones, sieving, grading, etc.

• outsourced services, provided for mining are individually classified under the appropriate taxable service. Services provided in relation to mining of mineral, oil and gas are comprehensively covered under this proposed service. With this, services provided in relation to both exploration and exploitation of mineral, oil or gas will be comprehensively brought under the service tax net.

6.2.1 The trend is to outsource part or whole of the mining activities. Since exploration and mining of mineral, oil or gas are comprehensively brought under the service tax, field formations may undertake necessary action.

Legislative development and observations:

  Earlier the legislature has tried to clarify through a 'Draft Circular' that various activities related to mining of minerals, oil or gas are taxable. But, realizing the reality that a non taxable service cannot become taxable merely by issuing clarification, the legislature has went into the right direction and brought a new category of service within the statute itself.  

Now all the services which is being provided for in relation to mining of mineral, oil or gas are taxable services. 

Some services, for example services provided by 'loaders / earth moving equipment' etc. may not be taxable under the category of 'goods transport by road service' but would be taxable in the new category if they are rendered in relation to mining.   Outsourced services, of any type provided for mining may be individually classified under the appropriate taxable service. However, services provided in relation to mining of mineral, oil and gas are comprehensively covered under this service. With this, services provided in relation to both exploration and exploitation of mineral, oil or gas are comprehensively brought