Can GST Be Imposed On Royalty Paid To Govt? Kerala High Court To Consider

The Kerala High Court has admitted a plea that has raised significant questions of whether royalty paid to the government qualifies as tax and if GST can be imposed on such royalty. 

The petitioner is engaged in the business of quarrying granite stones as per the quarrying lease granted to them by the Government under Rule 32 of erstwhile Kerala Minor Mineral Concession Rules 1967. 

As per the lease deed, the anticipated royalty was fixed at Rs.16 per ton for a period of one year. Later, the anticipated royalty was enhanced to Rs. 24 per ton pursuant to the additional quarrying lease. 

Meanwhile, the State Tax Officer issued an intimation ascertaining tax and penalty by treating this royalty paid by the petitioner to the government as part of the taxable turnover for the services received. The officer classified the royalty paid as consideration for licensing services received from the Government for the right to use minerals and treated the same as taxable supply of services. 

Accordingly, a demand notice was issued requiring the petitioner to pay the disputed tax and penalty. The burden was cast on the petitioner under Reverse Charge Mechanism (RCM) as the recipient of service to pay GST on the turnover of the service. 

The petitioner responded to the demand notice with a consolidated reply to the Tax Officer. However, without paying any heed to the same, the Officer issued a fresh demand notice to the petitioner with an identical demand. To this, the petitioner submitted another reply reiterating the impropriety and illegality of the GST levied on royalty paid to the government for the mineral extracted. 

Nevertheless, the Officer proceeded to issue show-cause notices under Section 74 of CGST/Kerala GST Act by reckoning the royalty as part of licensing services. 

Advocates Mohammed Sadique and Shankar V appearing for the petitioners pointed out that the Tax Officer had failed to note the settled legal position on the concept of royalty by the Supreme Court where it has been held that royalty is tax. Moreover, it was argued that Article 366 Clause 28 of the Constitution also defined taxation to include the imposition of any tax or impost, whether general or local or special. 

Therefore, according to the petitioner, the royalty payable on the extraction of mineral being in the nature of statutory impost comes under the preview of taxation. 

As such, the petitioner posed the following two questions before the Court: 

(1) Whether royalty paid by the petitioner to the government is tax as defined under Clause 28 of Article 366 of the Constitution of India and as a sequel of a further levy of tax (GST) is legal and justifiable. 

(2) Whether royalty paid by the petitioner to the government can be treated as part of the consideration for the supply of licensing services for the right to use minerals?

In the meanwhile, it was prayed that the proceedings for completion of assessments against the petitioner in pursuance of the show cause notices may be stayed pending disposal of the petition. 

Justice Bechu Kurian Thomas has granted interim relief to the petitioner until further orders. 

Also Read: Plea Challenges Demand Of GST On Royalty Paid For Quarrying Of Building Stone: Karnataka High Court Grants Interim Relief

Case Title: Royal Sand & Gravels Pvt Ltd. v. Union of India & Ors.

Click Here To Read/Download The Interim Order