Mineral mining rights granted by the government will be liable to the goods and services tax (GST) at the rate applicable on the supply of the extracted raw material, the Haryana Authority for Advance Rulings has ruled.
The decision should ease the mining sector’s tax burden and clear the ambiguity over whether such rights are liable to be taxed at the rate applicable to the supply of these minerals or at a higher residual rate of 18%.
The ruling was given on an application filed by Pioneer Partners, engaged in mining of boulders and extraction of minerals, which had secured a mining licence from the Haryana government in lieu of which royalty was being paid.
The applicant sought to know whether such royalty payment on account of mining rights was liable to tax in the hands of the applicant under the reverse charge mechanism — where the recipient of goods/services is required to pay tax instead of the supplier — and if so, the rate applicable — 5% valid on supply of minerals or the residual 18%.
The AAR held that such rights granted by the government would qualify as a service liable to tax at the rate applicable to the supply of the mineral being mined, which is 5% in the present case.
In light of the specific notification providing for reverse charge liability on services received from the government, it also held that the applicant must pay tax on such royalty or rent paid.
In many cases, GST paid became a cost for the businesses where the products were either outside the ambit of the tax — such as petroleum products — or were used for activities exempt from GST, such as power generation.
Companies that have paid tax on such rights at 18% may explore the possibility of claiming a refund of the excess amount if it has not been claimed as input credit. “This is one of the rare rulings in favour of industry and it would be interesting to see if the authorities would appeal against it or consider making changes in the rate schedule itself,” said Siddharth Mehta, indirect tax partner at PwC India.