Mining lease payments including royalty to Government attract 18% GST under Reverse Charge Mechanism, upfront security deposits exempt

The AAR Rajasthan held that the applicant is liable to pay GST at 18% (9% SGST + 9% CGST) on mining lease payments including royalty to Government of Rajasthan under Reverse Charge Mechanism. Upfront payments made before lease agreement execution are not subject to GST as they constitute security deposits adjusted against future payments. The applicant can pay GST from Telangana state and is eligible for Input Tax Credit on GST paid under RCM, subject to fulfilling conditions under Section 16 of CGST Act 2017.

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Issues Involved:

1. Liability of GST on Mining Lease payments under Reverse Charge Mechanism (RCM).
2. Applicable rate of GST on Mining Lease payments.
3. Liability to pay GST on Upfront Payments before the Lease Agreement.
4. Requirement for GST registration in Rajasthan versus Telangana.
5. Eligibility to claim Input Tax Credit (ITC) on GST paid under RCM.

Issue-wise Detailed Analysis:

1. Liability of GST on Mining Lease Payments under RCM:
The judgment determined that the applicant is liable to pay GST on Mining Lease payments, including Royalty, to the Government of Rajasthan under the Reverse Charge Mechanism (RCM). This conclusion was based on Serial No. 17 of Notification No. 11/2017-Central Rate dated 28.06.2017, which covers licensing services for the right to use minerals under SAC 997337 and is subject to GST. Furthermore, Serial No. 5 of Notification No. 13/2017-Central Rate dated 28.06.2017 specifies that services supplied by the government to a business entity, excluding certain exceptions, are liable for GST under RCM.

2. Applicable Rate of GST on Mining Lease Payments:
The applicable rate of GST on the Mining Lease payments, including Royalty, was determined to be 18%, split equally between SGST (9%) and CGST (9%).

3. Liability to Pay GST on Upfront Payments:
The judgment clarified that the applicant is liable to pay GST on Upfront Payments made as per the Tender Documents, even if these payments were made before the issuance of the Letter of Intent (LOI) and before entering into the Lease Agreement. The rationale was that these payments are considered advance payments, as they are adjusted against future payments once the mining operations commence. Section 2(31) of the CGST Act, 2017, which defines "consideration," supports this interpretation as it includes any payment made in respect of the supply of goods or services.

4. Requirement for GST Registration in Rajasthan versus Telangana:
The applicant cannot pay GST from the State of Telangana for services received in Rajasthan. According to Section 24(iii) of the CGST Act, 2017, a person required to pay tax under RCM must register in the state where they receive the services. Therefore, the applicant must register and pay GST in Rajasthan.

5. Eligibility to Claim Input Tax Credit (ITC):
The applicant is eligible to claim Input Tax Credit (ITC) on the GST paid under RCM, subject to the conditions laid out in Section 16 of the CGST Act, 2017. This section allows registered persons to claim ITC for input tax charged on supplies used in the course or furtherance of their business, provided they meet specific requirements such as possessing a tax invoice and having received the goods or services.

Ruling:

1. The applicant is liable to pay GST on Mining Lease payments, including Royalty, to the Government of Rajasthan under RCM.
2. The applicable rate of GST is 18% (SGST 9% & CGST 9%).
3. The applicant is liable to pay GST on Upfront Payments as per the Tender Documents.
4. The applicant must register and pay GST in Rajasthan, not from Telangana.
5. The applicant is eligible to avail ITC of the GST paid under RCM, subject to conditions under Section 16 of the CGST Act, 2017.

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