GST on Mining Royalty-Linked DMF & NMET Contributions: Telangana AAAR Recalibrates Tax Position

Background of the Dispute

The matter in In re Singareni Colleries Company Ltd (GST AAAR Telangana) was examined by the Appellate Authority for Advance Ruling, Telangana under Section 100 of the Telangana Goods and Services Tax Act, 2017. The appeal challenged Advance Ruling Order No. 31/2022 dated 07.06.2022 issued by the Telangana State Authority for Advance Ruling.

The assessee, M/s Singareni Colleries Company Ltd, is a government-controlled coal mining company jointly owned by the Government of Telangana and the Government of India. It operates coal mines across several districts in Telangana under mining leases.

Under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act, 1957), the assessee:

  • Pays royalty to the State Government, computed on the quantity of minerals extracted (Section 9)
  • Must contribute 30% of royalty to the District Mineral Foundation (DMF) under Section 9B
  • Must contribute 2% of royalty to the National Mineral Exploration Trust (NMET) under Section 9C

The controversy centred on whether these statutory contributions to DMF and NMET are liable to GST, and if so, at what rate and on what legal basis.

Questions Raised Before the Advance Ruling Authority

The assessee originally approached the Telangana Authority for Advance Ruling with two key questions:

  1. Whether royalty paid for mining lease is classifiable as “Licensing services for the right to use minerals including its exploration and evaluation” falling under heading 9973, taxable at the same rate as applicable on supply of like goods involving transfer of title in goods.
  2. How GST applies to statutory contributions made to DMF and NMET as per the MMDR Act, 1957.

Findings of the Lower Authority (Order No. 31/2022 dated 07.06.2022)

The Authority for Advance Ruling (AAR) held as follows:

  • On royalty classification and rate
    Royalty for mining lease was held to fall under tariff item 997337. Since entry 997337 is not listed at Serial No. 17(viiia) of the relevant rate notification, the AAR held that royalty attracts:

    • 9% CGST and
    • 9% SGST

  • On DMF and NMET contributions
    The AAR ruled that the same tax rate applicable to tariff item 997337 also applies to payments made to DMF and NMET.

Dissatisfied with this outcome, particularly on the treatment of contributions to DMF and NMET, the assessee carried the matter in appeal.

Grounds of Appeal Before the Appellate Authority

Before the Appellate Authority, the assessee widened the scope of its challenge and posed multiple questions, including:

  1. Whether royalty itself is liable to GST.
  2. Whether the service is appropriately classified under entry 9973 and should attract 5% GST even after 01.01.2019.
  3. Whether statutory contributions to DMF and NMET, which are separate trusts treated as distinct legal persons, can be treated as consideration for the mining lease.
  4. Whether payments to the State Government and contributions to DMF and NMET should be regarded as payment to one person or multiple persons.