Royalty payment and GST

[Nishtha Jain]

We have a party that pays royalty directly to the government ON BEHALF of the license holder. Can this be done? And should the RCM be paid by such party only or the license holder? Please guide on the same.

[Sadanand Bulbule]

GST on "royalty" is to be paid by the MINING LEASE holder under RCM, issued by the State Department of Mines and Geology. So the question of paying it on behalf of some other party does not fit into the frame of correct compliance.

Liability of tax under RCM would be saddled on the mining lease holder. Take precautions.

[KASTURI SETHI]

Perfect reply and in measured words and in the fitness of things by Sh.Sadanand Bulbule, Sir.

[Nishtha Jain]

Will it still be a non compliance if royalty is paid by the party as a 'Pure agent' of the mining lease holder?

[Nishtha Jain]

Also could you suggest what must be done with regards to GST in case the party has already paid the royalty to the government directly instead of the mining lease holder, should the RCM be paid by the party on the same? Because if RCM is not paid on the royalty, department will generate notice for the same. 

[Sadanand Bulbule]

Payment of tax under RCM by the agent amounts to clear non-compliance. A case of wilful self-sacrifice!

Secondly, the agent has to seek refund of wrong payment of tax in the absence of his liability. 

What is the hidden arrangement behind the payment of tax by the agent despite knowing that he need not pay it? Can you disclose it? 

“Self-assessment” under Section 39/59 means “self-disciplined” assessment—performance of duties as set out by the law. It also means self-honesty and responsibility. 
 

[Nishtha Jain]

Sir, party does not want to pay the tax, which they are not liable to pay. But the issue is that the Lease holder wasn't willing to pay the royalty amount and asked to pay directly to the government. Agent paid the royalty directly, but now when it comes to GST they are facing issue as to what to do. My question is, if the royalty is paid as a pure agent, is that approach compliant in terms of payment of royalty, disregarding the GST issue for the moment?

[Sadanand Bulbule]

Madam

I assume you are well aware that, tax is not levied with consent. So the only remedy is the lease holder alone must pay tax under RCM, irrespective of whether he likes it or not. 

The blades of adjudication are very sharp. Advise your client to abide by the law in his own interest. Otherwise “repentance” is the only option, besides facing the unpleasant consequences.

Prudence plays very important roles in taxation. 

[Nishtha Jain]

Sir,

I'm aware tax cannot be levied on consent. But royalty is not a tax, the party has paid the royalty as a pure agent to the government, not the GST on it, atleast not yet. Is this approach correct in any case? If not how can it be rectified?

[Shilpi Jain]

Even if royalty is paid by the party and not the lease holder, the challan will be generated in the name of the lease holder only 

When the party does not have any mining licence, how can one say there is receipt of service from govt?

So even if royalty amount is directly paid to the govt. By the party, there should be no rcm liability.

[KASTURI SETHI]

How the concept of 'pure agent 'comes into  play  ?

[Sadanand Bulbule]

GST & Royalty on mining orbit around each other. Any deviation in this regard becomes a nest for needless litigation.

[KASTURI SETHI]

Not litigation-free.

In order to qualify for 'pure agent', the conditions have to be fulfilled laid down under Rule 33 of CGST Rules, 2017. There must be contractual agreement. It has become a hotch-potch situation. Hence correctly interpreted, analyzed and concluded by Sh.Sadanand Bulbule, Sir. 

[KASTURI SETHI]

In continuation of my above reply :

Proper procedure has to be followed. Rules and regulations have been framed to be followed and honoured otherwise the very purpose of framing them would be defeated. Nobody can pay tax on his own volition. 

[Sadanand Bulbule]

Dear all

I take the liberty of highlighting the simple experienced fact that, to have the best fruits, taxpayers/ professionals/ other stakeholders are expected to analyse the deep roots of GST Act in full depth, dimension and profundity besides going directly to the heart of any complex matter thereof.

Miracles of “smartness” in one’s own mind are fabulous and are found in the most beautiful acts. Big changes often happen silently like day and night relentlessly. Internal walls built by “bricks of ego” need to be removed to move forward with self-responsibility in the interest of equity. Essentially it costs nothing to have this process but only willingness.

[Nishtha Jain]

Sir, as you mentioned contractual agreement is required for being a pure agent, contractual agreement is present. This was a one of case, the party has decided discontinue to deal with the lease holder anymore because of this issue. But currently it has become a head ache as there seem to be no remedy available to rectify what's already done. If the party claim royalty as an expense, RCM notice will be generated by the department. And if they pay the RCM which they are not liable to that's also a non compliance and an additional burden. 

[Nishtha Jain]

Dear Shilpi ma'am,

Your view is correct, but royalty is such nomenclature, as seen in many cases by us and also seen on other TMI queries, where assessee faces difficulty because Department generate notice for RCM on PAYMENT of royalty whether the liability arises or not. 

AI Summary

Reverse Charge Mechanism: GST on mining royalty is payable by the mining lease holder, not by a third-party agent.
Liability to pay GST on mining royalty under the reverse charge mechanism rests with the mining lease holder; a third party paying the tax under RCM is treated as non-compliance. Claiming the payment was made as a pure agent requires satisfying prescribed conditions and contractual support; mere direct payment to government does not shift RCM liability. Where an agent has paid tax without legal liability, the agent must seek refund of the wrongful payment, while departmental records and challans typically remain in the lease holder's name and may trigger notices.