Royalty for mining rights classified as licensing services for mineral use, taxable at 9%+9% with RCM on recipient.

Royalty paid to the government for a mining lease constitutes consideration for licensing services granting the right to explore and extract minerals; the payment is compensatory rather than a tax, aligning with recent precedent. Consequently the supply classifies as licensing services for the right to use minerals including exploration and evaluation and is taxable at 9% CGST and 9% SGST. Where the state provides the licensing service to a business in the taxable territory, tax liability falls on the recipient under the reverse charge mechanism. The alternative classification treating royalty as supply of goods attracting a 5% rate is rejected.

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Issues: (i) Whether royalty paid for a mining lease constitutes licensing services for the right to use minerals and merits classification under Service Accounting Code 997337; (ii) Whether such service can be classified under Sl. No. 17(iii) of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 attracting the rate of 5% (same rate as on supply of like goods involving transfer of title).

Issue (i): Whether royalty paid for a mining lease constitutes licensing services for the right to use minerals and merits classification under Service Accounting Code 997337.

Analysis: The service supplied by the State is the grant of a license/right to explore, extract and use minerals, with consideration in the form of royalty linked to quantity extracted. The nature of the supply is licensing of the right to use minerals (including exploration and evaluation) rather than transfer of specific pre-existing tangible goods. The transaction falls within the scope of services described under Service Accounting Code 997337 and is covered by the Reverse Charge entry for services supplied by government to a business entity.

Conclusion: The royalty paid for a mining lease is classifiable under SAC 997337 as licensing services for the right to use minerals including exploration and evaluation; taxable under GST with tax liability on the recipient under Reverse Charge Mechanism.

Issue (ii): Whether the said service can be classified under Sl. No. 17(iii) of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 attracting the rate of 5% (same rate as on supply of like goods involving transfer of title).

Analysis: Entry 17(iii) applies to transfer of the right to use specific tangible goods where goods are pre-existing and identifiable at the time of lease/rental. Mining leases grant rights to explore and extract natural resources that are not pre-existing specific goods at the time of grant; therefore the legislative intent and notifications distinguish such licensing of mineral rights from leasing of tangible goods. Relevant notifications and circulars and applicable classification demonstrate that the correct residual entry within Serial No.17 is 17(viii) and not 17(iii).

Conclusion: The service cannot be classified under Sl. No. 17(iii); classification under 17(iii) attracting 5% is rejected.

Final Conclusion: The supply consisting of grant of mining lease/royalty is classified as licensing services for the right to use minerals (SAC 997337) and is taxable under the residual entry of Serial No.17(viii) of Notification No.11/2017-Central Tax (Rate) at 9% CGST and 9% SGST, with tax payable by the recipient under Reverse Charge Mechanism as per Notification No.13/2017-Central Tax (Rate).

Ratio Decidendi: Where government grants rights to explore, extract and use minerals, the consideration in the form of royalty constitutes consideration for licensing services to use minerals (SAC 997337) and is taxable under GST at the rate applicable to Serial No.17(viii), with liability on the recipient under the Reverse Charge Mechanism.

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