GST on Royalty fee on Mining

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The Mines Act, 1952, governs India’s minerals and mining industry. Mining and minerals development and Regulation Act (MMDR) of 1957 governs it as well. All essential indirect tax legislations are now absorbed under the GST regime (except for a few taxes such as duty on Electricity, Royalty on the extraction of minerals from mines, etc. Any minerals extracted or consumed by the holder of a mining lease granted before or after the MMDR Act, 1957, are subject to royalty. In this article, you will understand the GST on Royalty fees on Mining.

What is the definition of royalty?

As a legal term, “royalty” denotes a payment given by people with the permission of the rights holders who exercise such rights.

Literary, copyright, patent, and other types of intellectual property are only a few examples of the types of rights at stake.

Even though mineral resources have nothing in connection with intellectual and creative pursuits except that they are typically utilized by individuals other than the proprietors upon payments of royalties, they are an essential aspect of a fiscal system and an important source of income for the Government.

Mining taxes in India

  • Among all countries, India’s mining industry is the highest taxed.
  • Mining has the highest effective tax rate in the world, at 60 to 64 percent, much above the average for all mining jurisdictions.
  • As a result, India is less competitive on the world market than other resource-rich nations because of the cascading impact of its high mining taxes.
  • In addition, royalty payments to the appropriate governments are a typical aspect of all mining leases in India, regardless of the type of mineral being mined.
  • Taxpayers in the field are feeling the pinch as the government increases taxes on mining royalty payments.
  • Prior to the introduction of Negative list-based taxation under the Service Tax Regime, only some government services were exempt from Service Tax and the remainder were subject to Service Tax.
  • It was then revised to include all government services in the taxation list.
  • Because of this reverse charge, the recipient was required to pay taxes on these services.
  • Since then, the tax authorities and the holders of mining leases have been in a continuing battle over whether the government’s issuance of mining leases is a taxable service and so subject to Service Tax.

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Royalty paid to the government for a mining lease subject to GST

Tax authorities and mining leaseholders have been at odds over whether the government’s grant of mining leases is a taxable service that should be subject to service tax or GST ever since the concept of taxable service was expanded under the former service tax regime (via the emergence of a negative list-based regime in 2012 and legislative amendments in 2016).

Because the beneficiary of such government services (i.e. The firm getting the mining lease) bears the statutory obligation to pay tax on such government services, if at all, under what is called in Indian indirect tax law as a reverse charge mechanism, this issue persists in the trade/industry.

In addition, the service tax and GST exposure might be substantial due to the significant amounts often owed as royalties or dead rent.

Taxes on royalty payments to the national and provincial governments are strongly opposed by constitutional and legal considerations.

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