12% OR 18%? THE GST ROYALTY DILEMMA

When Practice Feels Right... But the Law Demands a Second Look

In the life of a professional, the most powerful learning does not always come from reading bare provisions or analysing case laws-it often comes from real situations that quietly challenge our assumptions. Sometimes, what appears to be a settled and widely accepted practice turns out to deserve a closer look.

One such moment arose during a recent interaction with a publishing house. The publisher had been regularly paying GST under the reverse charge mechanism on royalties paid to various authors. This was not a one-off approach, but a consistent practice followed over several years. The tax was being discharged at the rate of 12 per cent, based on professional advice and what was generally understood within the industry to be the correct position.

At first glance, there seemed to be nothing unusual. The compliance was regular, the approach was consistent, and the understanding appeared to be widely accepted. However, when the relevant statutory provisions were revisited carefully-line by line-a simple but critical question emerged: Does the GST law actually prescribe a rate of 12 per cent for such royalty payments?

This single question changed the entire perspective. What initially appeared to be a routine compliance matter gradually transformed into a deeper interpretational exercise. It revealed that industry practice and legal provisions do not always align perfectly. It is precisely in such gaps that the role of a professional becomes most significant-bridging understanding with accuracy.

Understanding the Real Transaction: It Is Not About Books, It Is About Rights

At the heart of the issue lies a fundamental question: what exactly is the publisher paying for when royalty is paid to an author?

In common understanding, a book is seen as a physical product. It is printed, bound, sold, and read. However, from a legal perspective, a book carries two distinct elements. One is the physical form-the printed copy-which is treated as goods under GST. The other, far more significant element, is the intellectual creation-the copyright-which belongs to the author.

When a publisher pays royalties, it is not purchasing printed books, nor is it merely accessing content as a reader does. Instead, the publisher acquires a commercial right-the right to reproduce, publish, and distribute the author's work. This right exists independently of the physical book.

Understanding this distinction is crucial. The transaction is not a supply of books or content; it is a licensing of intellectual property. GST, being a law driven by classification, taxes this transaction based on its true nature rather than its outward appearance.

Where the Confusion Begins: Mixing Up Content with Copyright

The root of the problem lies in a subtle but critical misunderstanding. In several cases, royalty payments have been classified under SAC 998431, which covers online text-based information such as e-books, digital journals, and similar content delivered electronically.

At first glance, this may seem logical, especially where publishers are also involved in digital distribution. However, this classification applies to an entirely different transaction-the supply of content to the end consumer.

The relationship between a publisher and a reader is one of content consumption. In contrast, the relationship between an author and a publisher is one of grant of rights. This distinction, though simple, is often overlooked. By treating royalty as a supply of online content, the true character of the transaction is lost. The publisher is not receiving content for consumption; it is receiving the legal authority to reproduce that content.

In GST, such distinctions are not merely academic-they directly determine classification and, consequently, the applicable tax rate.

Getting the Classification Right: The Role of SAC 997334

Once the true nature of the transaction is understood, the classification becomes clear. A careful reading of the Scheme of Classification of Services [Annexure to Services Rate Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017] shows that royalty paid to authors fits squarely within SAC 997334, which covers licensing services for the right to reprint and copy manuscripts, books, journals and periodicals.

This description aligns perfectly with the commercial arrangement between an author and a publisher. The author grants permission, and the publisher exercises that permission by printing and distributing the work.

It is important to appreciate that GST classification is not based on convenience or industry practice, but on precise statutory descriptions. SAC 997334 is not a broad or interpretative category-it is a specific and directly applicable entry. Recognising this correct classification is the first step towards arriving at the correct tax treatment.

Reverse Charge Mechanism: Understanding Its True Role

At this stage, it becomes equally important to address a widespread misconception that has significantly contributed to the confusion surrounding the taxation of royalties. In many professional circles, the reverse charge mechanism is often misunderstood as affecting the applicable GST rate. This perception, though widely prevalent, is fundamentally incorrect.

The reverse charge mechanism does not determine the tax rate. It merely identifies the person who is liable to discharge that tax. The applicable rate continues to be governed exclusively by the rate notification, irrespective of whether the tax is paid under forward charge or reverse charge. In the context of royalty paid to authors, Entry 9A of Notification No. 13/2017-Central Tax (Rate) provides as under:

A plain reading of the above entry makes it clear that the liability to pay GST is shifted from the author to the publisher under the reverse charge mechanism. This shift is primarily intended to ease compliance for authors, many of whom may not engage in regular taxable activities or have structured tax compliance systems. However, this procedural shift does not, in any manner, alter the nature of the supply or the rate at which it is taxed.

The publisher, while discharging tax under reverse charge, is required to apply the same rate that would have been applicable had the author himself discharged the tax under forward charge. The mechanism, therefore, changes the person responsible, but not the quantum of tax payable.

This distinction, though simple in principle, assumes considerable significance in practice. A misunderstanding at this stage can lead to incorrect application of rates, as has been observed in several instances where the existence of reverse charge has been mistakenly associated with a perceived concessional rate.

In essence,

Reverse charge decides who pays the tax-
The law alone decides how much tax is to be paid.

The Turning Point: Determining the Correct Rate Under Law

Once the classification is settled, the next question that naturally arises is: what is the applicable GST rate? At this stage, a common mistake often creeps in. Many tend to assume that the rate flows from the SAC itself. In reality, the SAC merely identifies the nature of the service; the applicable rate must always be determined from the relevant rate notification.

In the present case, reference must be made to Notification No. 11/2017-Central Tax (Rate), which prescribes GST rates for services. Services relating to intellectual property fall under Heading 9973, specifically Entry 17, which covers the temporary or permanent transfer, or the permitting of the use or enjoyment, of intellectual property rights.

A careful reading of Item (ii) of Entry 17 is particularly relevant and reads as under:

Item (ii)
Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right - 9%

The above rate of 9 per cent represents the Central Tax component. When the corresponding State Tax of 9 per cent is added, the effective rate is 18 per cent. This is the applicable rate for such services.

It is important to emphasise that there is no specific provision in the notification prescribing any concessional rate for royalty paid to authors. The widely held belief that such transactions attract GST at 12 per cent appears to stem from a blending of distinct concepts-particularly the exemption for printed books and the concessional rate of 5 per cent for e-books. However, these relate to entirely different supplies and cannot be extended to royalty transactions.

A Numerical Illustration: The Hidden Cost of a Small Misunderstanding

The practical implications of this issue can be better appreciated through a simple illustration. Consider a case where a publisher pays a royalty of Rs. 10,00,000 to an author during a financial year. Acting on a commonly followed industry practice, the publisher discharges GST under the reverse charge mechanism at a rate of 12 per cent. Accordingly, the tax paid amounts to Rs. 1,20,000. However, as discussed earlier, the correct rate applicable to such royalty payments is 18 per cent. On this basis, the GST liability should have been Rs. 1,80,000. This results in a short payment of Rs. 60,000 for that year alone.

At first glance, the difference may appear modest. Yet, when viewed over a longer period and across multiple authors, the impact becomes far more significant. If the same practice continues for, say, five years, the cumulative shortfall in tax could rise to Rs. 3,00,000, excluding interest. Once interest under Section 50 of the CGST Act is factored in, the financial exposure increases further, turning what seemed like a minor interpretational issue into a material compliance risk.

What makes this situation particularly noteworthy is that the error does not arise from non-compliance, but from a misunderstanding of the applicable rate. The tax has been paid, returns have been filed, and records have been maintained-yet the liability remains understated.

This illustration highlights an important lesson. In GST, even a small error in classification or rate determination can silently accumulate into a significant exposure over time. What begins as a difference of a few percentage points can, if left uncorrected, translate into substantial financial consequences.

September 2025 Rate Rationalisation: No Change for Author Royalties

It is equally important to address another aspect that may create confusion among professionals-the GST rate rationalisation carried out in September 2025. Whenever such large-scale changes are announced, there is a natural tendency to assume that all categories of services will be affected in some way. However, in the case of royalty paid to authors, the position remains unchanged. The rationalisation exercise did not introduce any specific amendment affecting the taxation of intellectual property services relating to literary works. Such services continue to fall under the existing framework governing intellectual property rights and remain taxable at the standard rate.

In other words, despite the broader restructuring of certain GST rate slabs, there has been no direct or indirect change in the rate applicable to royalty paid to authors. The classification, the applicable entry under the rate notification, and the reverse charge mechanism all continue to operate in the same manner as before.

This clarification is particularly important because, in practice, rate changes in one area often lead to assumptions in another. In the present context, however, the law has maintained continuity, and the tax treatment of royalty remains unaffected.

From Assumption to Authority: A Professional Awakening

In the final analysis, the issue of GST on royalty paid to authors is not merely a question of rate or classification-it is a reminder of a deeper professional responsibility. The law, in its structure, is often clear; it is our interpretation that sometimes drifts, influenced by practice, perception, or precedent.

This discussion highlights how easily a widely accepted approach can continue for years without being closely tested against the actual statutory provisions. It also demonstrates that in GST, even a small misunderstanding-whether of classification, rate, or mechanism-can quietly translate into significant financial exposure over time.

At its core, the issue teaches us three enduring lessons. First, classification must always be based on the true nature of the transaction, not on its outward resemblance. Second, the tax rate must flow strictly from the notification, not from assumptions or industry trends. Third, the reverse charge mechanism, while shifting responsibility, does not alter the tax itself.

For professionals, this is more than a technical correction-it is an opportunity to reaffirm the discipline of going back to the law, reading it carefully, and applying it with clarity and conviction.

'The author creates the thought,
The publisher gives it form,
But the law taxes the invisible bridge between the two.'

In the end, GST does not merely demand compliance-it demands understanding.

---

BY CA. RAJ JAGGI AND ADV. KIRTI JAGGI