Royalty Not a Tax, 18% GST Payable on Mining Lease Payments: Patna HC [Read Order]

In a recent ruling, the Patna High Court upheld the levy of 18% GST on royalty paid for mining leases, holding that royalty is not a tax but consideration for the supply of service.

Broad Son Commodities Pvt. Ltd. and other petitioners had filed writ petitions challenging the GST charged on royalty amounts paid to the State Government for mining leases. These petitioners were lessees of sand ghats under contracts signed between 2015 and 2019.

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Initially, they had paid GST at 5% under the reverse charge mechanism, based on an advance ruling that classified the services under SAC 997337 (licensing services for mineral rights). However, a later appellate ruling revised the applicable GST rate to 18%, effective retrospectively from July 1, 2017, prompting the petitioners to challenge the same.

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The petitioners counsel argued that royalty is in the nature of a tax and not a payment for any service, and therefore, should not attract GST. They also argued that there was discriminatory treatment, as liquor license fees were exempt from GST while mining leases were taxed, violating the right to equality under Article 14 of the Constitution. They further argued that many lease agreements were executed before the GST regime came into effect, and thus, GST should not apply retrospectively.

In response, the State and tax authorities submitted that royalty is a contractual payment and not a tax. They argued that mining leases involve a supply of service as defined under Section 7 of the CGST Act, and royalty paid for the same is liable to GST.

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The government justified the classification of the service and the rate of 18% GST under the applicable SAC code. They submitted that the reverse charge mechanism correctly places the tax liability on the recipient of the service, i.e., the lessees.

The bench comprising Justice Rajeev Ranjan Prasad Honourable Mr. Justice Sourendra Pandey observed that the petitioners had accepted the earlier advance ruling applying 5% GST and had not challenged its validity. The court held that royalty paid for mining leases is a consideration for the supply of service and not a statutory tax.

The bench referred to Supreme Court rulings, including the MADA case, to support the view that royalty is not a tax and is liable to GST. The court also found no merit in the Article 14 challenge, stating that the GST Council is constitutionally empowered to recommend exemptions and tax rates, and different treatment of liquor and mining licenses does not amount to discrimination.

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The court ruled that royalty payments made under mining leases are liable to 18% GST and that there was no violation of any constitutional or legal provision. The petitions were accordingly dismissed.

To Read the full text of the Order CLICK HERE

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