GST on Royalty: Applicability, GST Rate, SAC Code, RCM on Royalty Under GST

GST on royalty is a fee given by businesses to a property or patent owner for the right to use it. This fee could be a fixed amount based on the asset's value or a percentage of the profit generated by using the asset.

Continue reading as we talk about the GST charged on royalty payments in detail, including its applicability, RCM on royalty under GST, input tax credit, and advance rulings related to it.

Applicability of GST on royalty

The Goods and Services Tax (GST) system considers the ‘supply’ of goods or services as a taxable event. This means that if someone carries out a sale, transfer, rental, exchange, lease and receives payment, they are liable to pay GST. Although, this does not include specific cases listed in Schedule II and Schedule III.

When it comes to royalty payments on mining operations, the Mines and Minerals Act requires the holder of a mining lease to pay royalty for the minerals they remove or consume. The Supreme Court has clarified that even processing minerals is considered consumption, and therefore, the entire quantity of minerals is subject to royalty payment. In certain cases, reverse charge provisions would also apply for GST on royalty, explained in the next section.

The GST on royalty income in India is determined based on the rate applicable to goods such as minerals. This means that the same tax rate applicable to minerals—18%— is accepted as the royalty GST rate.

Additionally, individuals who are liable to pay GST under the RCM for royalty should make sure to submit GST invoices in an organized manner. It is important to include the necessary details such as the Service Accounting Code (SAC) and provide the required documentation.

The royalty SAC code is 997337, which falls under Heading 9973. It is categorised as licensing services for the right to use minerals, including their exploration and evaluation.

Cases where GST on royalty has to be paid on a reverse-charge basis

The Central Board of Indirect Taxes and Customs (CBIC) in Notification Nos. 22/2016- ST, 24/2016-ST and Circular No. 192/02/2016-ST has clarified that royalties and other charges collected by the government are considered ‘taxable services.’ Therefore, the liability to pay GST on such royalties is determined under the Reverse Charge Mechanism (RCM). 

Can input tax credit be taken of GST paid on royalty?

Input tax credit (ITC) is an amount that the taxpayer can reclaim while paying taxes for outward supplies. Simply put, ITC is the tax deducted that you have already paid when purchasing a good/service. Businesses can use this credit to lower or completely get rid of the sales taxes they are required to pay.

If the recipient of the royalty is registered under GST, they can claim ITC for the GST paid on the royalty. However, if the recipient is not registered under GST, they cannot claim any input tax credit for the GST paid on the royalty.

Advance rulings on GST on royalty 

An advance tax ruling is a written clarification of the tax laws provided by tax authorities. It is intended to assist businesses and individuals who have uncertainties or confusion regarding specific provisions of the tax laws. 

Here is an Advance tax ruling issued by the Authority of Advance Ruling (AAR) Chhattisgarh:

Facts of the case: The case involves the applicant—M/s Shanti Enggicon—being subcontracted by M/s KCC-MBBL (Joint Venture) for executing a project awarded by M/s NTPC Ltd. The applicant is responsible for paying royalty to the Chhattisgarh government for mining rights.

Case: The issue at hand is whether M/s Shanti Enggicon Private Limited is liable to pay GST on royalty amounts under the RCM and whether the royalty should be included in the value of the service for GST payment purposes.

Ruling: After careful examination of the relevant provisions of the CGST Act, 2017, the following ruling is made: 

• Liability under RCM: The applicant is liable to pay GST on royalty amounts under the RCM. The services received by the applicant fall under the category of ‘Licensing services for the right to use minerals’. As per Notification No. 11/2017-CT (Rate), the GST rate for a service similar to the sale of goods (transfer in ownership) is the same as the rate of their supply. 
• Applicable GST Rate: GST rate should depend on the supply of the like goods. This ensures consistency in the taxation of similar transactions.
• Inclusion in Value of Service: According to Section 15 of the CGST Act, the value of a supply of goods/services includes all charges, including royalty, imposed by the law (other than the GST Act). This means that the royalty charged on soil is to be added to the value of the service as it is imposed by the law (Chhattisgarh Mining Act).

Here is another advance ruling issued regarding the GST on royalty by the Supreme Court:

Case: The dispute in the 'India Cement Ltd. vs. State of Tamil Nadu' case was whether royalty paid on mining operations should be regarded as a tax or not.

Ruling: The Supreme Court concluded that because royalties are paid for the use of land, they should be regarded as taxes. The decision was made with an understanding that royalty had an inherent economic worth derived from the mineral that was extracted and the resources used in its extraction. Each of these resources, including land, capital, and labor, has a distinct economic worth. So, royalty is seen as a type of tax based on how much the mineral is worth when it is sold.

Explanation: The Court clarified that royalty is indeed a tax and that a cess on royalty cannot be imposed by the State Legislature. This is because the Central Act already covers the taxation aspect, and the State Legislature lacks the authority to levy such a cess. The Court also mentioned that the royalty is paid for the use of said land and not a tax on land.

Conclusion

GST on royalty is only applicable when you are using intellectual property rights such as patents, trademarks, copyrights, and designs. If the royalty is paid for other types of properties like land, buildings, or machinery, GST may not be applicable.