GST Ruling: Licensing services for mineral rights in Gujarat taxed at 18% under SAC 997337

The Authority for Advance Ruling (AAR) determined that the service provided by the State of Gujarat to the applicant, involving licensing services for the right to use minerals, falls under SAC 997337. The applicable GST rate for this service is 18% (9% CGST + 9% SGST) from July 2017 onwards, as clarified retrospectively by Notification No. 27/2018-Central Tax (Rate).

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Issues Involved:
1. Classification of service for which royalty is being paid.
2. Rate of GST on services provided by the State of Gujarat for which royalty is being paid.

Issue-Wise Detailed Analysis:

1. Classification of Service

The applicant, engaged in quarrying "Black Trap" material, sought clarification on the classification of the service for which royalty is paid. The service is classified under Tariff Heading 2517, attracting GST at 5% on the supply of the product.

The applicant argued that the service provided by the State of Gujarat could be classified under tariff 9973, specifically 997337, as “Licensing services for the right to use minerals including its exploration and evaluation.” This classification implies that the GST rate on such services should be the same as on the supply of like goods involving transfer of title in goods.

The Authority for Advance Ruling (AAR) examined the applicant's lease agreement with the Government of Gujarat, which required the payment of an annual deed rent or royalty. The AAR referred to Notification No. 11/2017-Central Tax (Rate) and its annexure, which defines Service Accounting Codes (SAC) for various services. The relevant SAC for the service in question is 997337, which covers "Licensing services for the right to use minerals including its exploration and evaluation."

The AAR confirmed that the nature of the service received by the applicant falls under SAC 997337. This classification is supported by the Sectoral FAQ published by the C.B.E. & C., which states that royalty payments for licensing services for the exploration of natural resources are treated as a supply of services.

2. Rate of GST on Services Provided by the State of Gujarat

The AAR analyzed the applicable GST rate based on the classification of the service. The service of licensing for the right to use minerals is covered under sub-heading 997337. The relevant entries in Notification No. 11/2017-Central Tax (Rate) and its subsequent amendments were examined to determine the applicable GST rate.

Initially, the service was covered under the residual entry at Serial No. 17(vi), which prescribed the same rate of tax as on the supply of like goods involving the transfer of title in goods. However, subsequent amendments clarified that the rate of GST for such services should be 18% (9% CGST + 9% SGST).

The AAR relied on the decision of the Hon’ble Supreme Court in W.P.I.L. Ltd. v. Commissioner of Central Excise, which held that clarificatory notifications have retrospective effect. Therefore, the amendments made by Notification No. 27/2018-Central Tax (Rate) to clarify the GST rate on licensing services for the right to use minerals are applicable retrospectively from the date of Notification No. 11/2017-Central Tax (Rate).

The AAR concluded that the service provided by the State of Gujarat to the applicant, classified under SAC 997337, attracts an 18% GST rate from July 2017 onwards.

Ruling:
1. Classification of Service: The activity undertaken by the applicant is classifiable under Heading 9973 (Leasing or rental services, with or without operator), specifically under sub-heading 997337 as "Licensing services for the right to use minerals including its exploration and evaluation."
2. Rate of GST: The service attracts an 18% GST rate (9% CGST + 9% SGST).

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