RCM on Royalty Under GST: Taxability and Recent Judicial Developments
GST on mining royalty is payable at 18% under RCM, as royalty is treated as consideration for Government-granted mineral rights.
RCM on royalty under GST applies where a business pays royalty to the Government for mining rights or similar rights. In mining cases, royalty paid to the State Government is treated as consideration for licensing services. The mining lessee pays GST under reverse charge under Entry 5 of Notification No. 13/2017-Central Tax (Rate) dated 28 June 2017. RCM on Royalty...
RCM on royalty under GST applies where a business pays royalty to the Government for mining rights or similar rights. In mining cases, royalty paid to the State Government is treated as consideration for licensing services. The mining lessee pays GST under reverse charge under Entry 5 of Notification No. 13/2017-Central Tax (Rate) dated 28 June 2017.
RCM on Royalty Under GST
Reverse charge means the recipient pays GST instead of the supplier. Section 2(98) of the CGST Act, 2017 defines reverse charge. The liability arises under Section 9(3) or Section 9(4) of the CGST Act and Section 5(3) or Section 5(4) of the IGST Act.
For Government royalty, the relevant entry is Entry 5 of Notification No. 13/2017-Central Tax (Rate). This entry covers services supplied by the Central Government, State Government, Union Territory or local authority to a business entity located in the taxable territory.
Mining royalty falls under this entry because the State Government grants the lessee the right to extract minerals. The lessee receives the service and pays GST under RCM.
RCM on Mining Royalty
Mining royalty is paid by a mining leaseholder to the Government for extraction of minerals from a leased area. Under GST, this is treated as a service by way of grant of mineral rights.
This applies to royalty paid for minerals such as stone, sand, limestone, coal, iron ore, granite, bauxite, and other minerals covered under mining laws.
GST Rate on Mining Royalty
GST on mining royalty is payable at 18%.
CBIC Circular No. 164/20/2021-GST clarified that grant of mineral exploration and mining rights is classified under SAC 997337. This code covers licensing services for the right to use minerals, including exploration and evaluation.
The circular clarified that such service attracts GST at 18%. This position applies to the disputed period from 1 July 2017 to 31 December 2018 also.
For intra-State royalty payments, the lessee pays 9% CGST and 9% SGST. For inter-State cases, the lessee pays 18% IGST.
Government Royalty Under GST
Government royalty includes payments made for rights, licences, permissions, or concessions granted by the Government.
Mining royalty is the common example. Similar issues arise in payments for natural resources, spectrum rights, licence fees, and other Government-granted rights.
The key test is whether the payment is consideration for a supply. If the Government grants a right to a business entity for consideration, GST applies unless a specific exemption applies.
A tax, fine, penalty, or statutory fee is not automatically taxable. Its GST treatment depends on the nature of the payment, the law under which it is collected, and whether there is a supply.
Judicial Developments on Royalty
In Mineral Area Development Authority v. Steel Authority of India, a nine-judge Bench of the Supreme court held that royalty is not a tax. The court held that royalty is contractual consideration paid by the mining lessee.
This judgment was not a direct GST classification ruling. Still, it has strong relevance for GST disputes because it supports the department’s position that royalty is consideration and not tax.
ITC on GST Paid Under RCM on Royalty
ITC of GST paid under RCM on royalty is available where the royalty relates to taxable business activity.
The conditions under Section 16 of the CGST Act must be satisfied. The credit should not be blocked under Section 17(5).
For example, a registered mining company pays GST under RCM on royalty for extracting taxable minerals. The royalty is directly linked to taxable output supply. ITC is available if the company satisfies the GST credit conditions.
If the mining output is exempt, ITC is not available to that extent. If the business has both taxable and exempt supplies, proportionate reversal under Section 17 applies.
Payment and Reporting in GSTR-3B
GST under RCM must be paid through the electronic cash ledger. The taxpayer cannot use ITC balance to pay RCM liability. After cash payment, eligible ITC is claimed in the GST return.
The RCM liability is reported in Table 3.1(d) of GSTR-3B. Eligible ITC is reported in Table 4.
The taxpayer should reconcile royalty challans, mining department demands, RCM tax payment, and ITC claim every month.
Documents Required for RCM on Royalty
A business paying royalty should maintain a proper RCM file.
The file should contain the mining lease agreement, royalty demand notice, Government challan, royalty payment receipt, RCM working, self-invoice where applicable, payment voucher, GSTR-3B extract and ITC working.
This documentation becomes important during GST audit, scrutiny, and departmental proceedings.
Conclusion
RCM on royalty under GST is a major compliance issue for mining businesses. Royalty paid to the Government for mining rights is treated as consideration for licensing services under SAC 997337. GST is payable at 18% under RCM by the mining lessee.
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