Royalty, a payment made by businesses to an intellectual property or asset owner for usage rights, can be structured as a fixed sum or a percentage of generated profits. This discussion will look at the intricacies of Goods and Services Tax (GST) as applied to royalty payments, covering its enforceability, the Reverse Charge Mechanism (RCM), eligibility for input tax credit, and relevant advance rulings.

Applicability of GST on Royalty

Under the Goods and Services Tax (GST) framework, any ‘supply’ of goods or services, encompassing sales, transfers, rentals, exchanges, and leases, is generally deemed a taxable event, obligating the party receiving payment to remit GST. Exceptions exist for specific scenarios outlined in Schedule II and Schedule III.

Regarding royalty payments from mining operations, the Mines and Minerals Act mandates that mining leaseholders pay royalties for extracted or consumed minerals. The Supreme Court has affirmed that mineral processing constitutes consumption, making the full quantity of minerals subject to royalty. Reverse Charge Mechanism (RCM) provisions may also apply to GST on royalty in certain situations, which will be elaborated further.

In India, GST on royalty income is aligned with the tax rate of the underlying goods, such as minerals. Consequently, the accepted GST rate for royalty is 18%, mirroring the rate for minerals. Taxpayers responsible for GST on royalty under RCM must ensure their GST invoices are meticulously prepared, including essential details like the Service Accounting Code (SAC). The designated SAC code for royalty is 997337, classified under Heading 9973, specifically for licensing services related to mineral usage, exploration, and evaluation.

When GST on Royalty is Subject to Reverse Charge

The Central Board of Indirect Taxes and Customs (CBIC) has clarified, through Notification Nos. 22/2016-ST, 24/2016-ST, and Circular No. 192/02/2016-ST, that governmental collections like royalties and other fees are classified as ‘taxable services.’ Consequently, the obligation to remit GST on these royalties falls under the Reverse Charge Mechanism (RCM).

Eligibility for Input Tax Credit on Royalty GST

Input Tax Credit (ITC) represents a recoverable tax amount that taxpayers can offset against their tax liabilities for outward supplies. Essentially, ITC accounts for the tax already paid during the acquisition of goods or services. Businesses use this credit to reduce or eliminate their payable sales taxes.

For royalty recipients registered under GST, claiming ITC for GST paid on royalty is permissible. Conversely, unregistered recipients are ineligible to claim such input tax credit.

Advance Rulings Regarding GST on Royalty

An advance tax ruling serves as an official written clarification of tax laws issued by tax authorities, providing guidance to businesses and individuals facing ambiguities in specific tax provisions. The Authority of Advance Ruling (AAR) Chhattisgarh issued a pertinent ruling in a case involving M/s Shanti Enggicon.

Case Details:

M/s Shanti Enggicon, a subcontractor to M/s KCC-MBBL (Joint Venture) for an NTPC Ltd. project, was obligated to pay royalty to the Chhattisgarh government for mining rights.

Key Issues:

The central questions were whether M/s Shanti Enggicon Private Limited was liable for GST on royalty amounts under the RCM and if royalty should be incorporated into the service value for GST calculation.

AAR Ruling:

Following a thorough review of the CGST Act, 2017, the AAR ruled as follows:

• RCM Liability: The applicant is indeed liable to pay GST on royalty under the RCM. The services fall under ‘Licensing services for the right to use minerals.’ Notification No. 11/2017-CT (Rate) stipulates that the GST rate for services akin to goods transfer is consistent with the supply rate of those goods.
• Applicable GST Rate: The GST rate should correspond to the supply rate of similar goods, ensuring uniform taxation.
• Service Value Inclusion: As per Section 15 of the CGST Act, the value of goods/services supplied includes all legally imposed charges, such as royalty (excluding GST Act impositions). Therefore, royalty on soil, mandated by the Chhattisgarh Mining Act, must be added to the service value.

Another significant advance ruling on GST on royalty came from the Supreme Court in the ‘India Cement Ltd. vs. State of Tamil Nadu’ case.

Case Details:

The core dispute was whether royalty paid on mining operations should be categorized as a tax.

Supreme Court Ruling:

The Supreme Court concluded that royalties, being payments for land usage, are indeed a form of tax. This determination was based on the understanding that royalty possesses an inherent economic value derived from the extracted mineral and the resources used in its extraction.

Given that resources like land, capital, and labor each hold distinct economic worth, royalty is perceived as a tax type directly linked to the commercial value of the mineral.

Clarification:

The Court explicitly stated that royalty is a tax and, consequently, a cess on royalty cannot be imposed by State Legislatures, as the Central Act already addresses this taxation aspect.

The Court further clarified that royalty is a charge for land use, not a direct tax on the land itself.

Conclusion

In summary, Goods and Services Tax on royalty is generally relevant when dealing with intellectual property rights, including patents, trademarks, copyrights, and designs.

For royalties associated with other asset categories, such as land, structures, or equipment, GST imposition may not apply.

FAQs on GST on Royalty Payments

• What is the GST rate on royalty payments?
  Royalty is taxed at 18% GST, aligned with the rate of the underlying goods such as minerals. The SAC code is 997337 under Heading 9973.
• Is GST on royalty payable under reverse charge (RCM)?
  Yes. As clarified by the CBIC, royalty paid to the government is a taxable service, so the recipient of the mining right (the royalty payer) must deposit GST under the Reverse Charge Mechanism.
• Can I claim Input Tax Credit on GST paid on royalty?
  Yes, if you are registered under GST. Unregistered recipients are not eligible to claim ITC on royalty GST.
• What is the SAC code for royalty under GST?
  SAC 997337 – licensing services for the right to use minerals, including their exploration and evaluation, classified under Heading 9973.
• Is royalty added to the taxable value for GST?
  Yes. Under Section 15 of the CGST Act, royalty (for example on soil or minerals) is included in the service value for GST, as held in the AAR ruling on M/s Shanti Enggicon.