GST on royalty paid to government for mining on or after 01.01.2019

CA Sarath R Krishnan | Last updated: 09 March 2020

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Quick Summary

This article clarifies the Goods and Services Tax (GST) implications on royalty payments made to the government for mining activities, particularly for businesses involved in quarrying. It details the differing GST rates applicable before and after January 1, 2019, and explains the concept of Reverse Charge Mechanism (RCM). The discussion highlights that licensing services for mineral extraction are taxed based on the supply of like goods until December 31, 2018, and subsequently at 18% from January 1, 2019.

GST on royalty paid to government for mining is a confusing area. There are two scenarios i) GST on royalty paid to Govt before 01.01.2019 ii) GST on royalty paid to Govt on or after 01.01.2019. The discussion is mainly focused in the point of view of assessee engaged in the business of quarry.

As per Entry No. 5 of Notification No. 13/2017-Central Tax (rate) dated 28.06.17, GST on services supplied by Central Govt, State Govt or local authority, to a business entity needs to be paid by such business entity under RCM.

SAC Code: 9973

The License to extract and use of mineral ores is not covered by any specific entries in the serial no. 17 of the Notification No.11/2017 and 27/2018 and hence falls under the residual entry.

Prior to 01.01.2019

As per entry No. 17 (vi) of Notification No. 11/2017 – Central Tax (Rate) dated 28th June 2017 further amended by Notification No.1/2018- Central Tax (Rate) dated 25th January 2018 , for leasing or rental services with or without operator and for the transfer of the right to use any goods for any purpose, the GST rate as is applicable for the supply of like goods involving a transfer of title in goods shall be charged. Hence in case of assessee engaged in the business of quarry ie Rock/Stone, GST rate for royalty is 5%.

GST on Mining Royalties Paid to Government

Case Law

Case Name: M/s N.M.D.C Ltd (GST AAR Karnataka)
Appeal Number: Advance Ruling No.KAR ADRG 69/2019

On or after 01.01.2019

As per entry No. 17 (viii) of Notification No. 27/2018 - Central Tax (Rate) dated 31st December 2018, for leasing or rental services with or without operator, the applicable GST rate is 18% (CGST+SGST).

Conclusion

The royalty paid in respect of Mining Lease is a part of the consideration payable for the Licensing services for right to use minerals including exploration and evaluation falling under the Head 9973 which is taxable at the rate applicable on supply of like goods involving transfer of title in goods upto 31.12.2018 and taxable at 9% CGST and 9% SGST from 01.01.2019 onwards under the residual entries of Serial No.17 of the Notification No.11/2017- Central Tax dated 28.06.2017.

FAQ :

The confusion arises from two scenarios: GST on royalty paid before January 1, 2019, and GST on royalty paid on or after January 1, 2019.

Under Reverse Charge Mechanism (RCM), a business entity receiving services from the Central Government, State Government, or local authority, such as a license to extract minerals, is required to pay the GST.

Prior to January 1, 2019, the GST rate for royalty on mining, specifically for rock/stone quarrying, was 5%.

On or after January 1, 2019, the applicable GST rate for leasing or rental services, including mining licenses, is 18% (9% CGST and 9% SGST).

The SAC Code for royalty paid for mining is 9973.