Bar Council of India Compliance Notice This article is published strictly for general legal awareness and educational purposes. It does not constitute legal advice, does not create an advocate-client relationship, and should not be relied upon as a substitute for professional legal counsel. Readers are strongly advised to consult a qualified Advocate or Chartered Accountant for advice specific to their individual matter. All facts discussed herein are generalised and anonymised for illustrative purposes only. No confidential client information has been disclosed.
Table of Contents
- Introduction: Why Mining Contractors Must Understand GST in 2026
- Is GST Applicable on Mining Royalty?
- Understanding Reverse Charge Mechanism (RCM) on Royalty
- A Typical GST Enforcement Pattern in the Mining Sector (2025–26)
- What GST Provisions Are Commonly Violated?
- Section 73 vs Section 74: Why the Distinction Is Critical
- Key Grounds of Appeal Available to Mining Contractors
- Important High Court Judgments on Consolidated SCN (2025–2026)
- Frequently Asked Questions (FAQ)
- Conclusion & Recommended Action Steps
1. Introduction: Why Mining Contractors Must Understand GST in 2026
In 2026, GST enforcement in the mining sector has reached an unprecedented level. The GST department across multiple states — including Madhya Pradesh, Rajasthan, Chhattisgarh, and Jharkhand — is actively issuing Show Cause Notices (SCNs) to mining contractors who have not discharged their GST liability under Reverse Charge Mechanism (RCM) on royalty paid to state governments.
The core issue is straightforward but widely misunderstood: when a state government grants a mining lease to a contractor and collects royalty in exchange, it is legally treated as a supply of service under GST law. The GST on this service is not paid by the government — it is paid by the mining contractor under RCM.
Thousands of small and medium mining contractors across India, especially those operating under leases for materials like murrum soil, sand, limestone, and gravel, have been caught unaware of this obligation. The result: multi-year demand notices with heavy penalties.
This article provides a structured legal analysis of this issue — the applicable provisions, the common grounds of challenge, and the remedies available to affected contractors in 2026.
Yes — GST at 18% is clearly applicable on royalty paid for mining rights. This has been the settled legal position since the inception of GST in 2017, though enforcement has intensified significantly only in recent years.
Legal Basis of Taxability
When a state government grants mining rights to a contractor in exchange for periodic royalty payments, this transaction is treated as a supply of service under the CGST Act, 2017. Specifically, the grant of a right to mine minerals is classified as:
Service: "Licensing services for the right to use minerals including its exploration and evaluation" SAC Code: 997337 GST Rate: 18%
The tax is payable by the recipient of the service (i.e., the mining contractor) and not by the government, through the Reverse Charge Mechanism under Section 9(3) of the CGST Act.
Supreme Court Clarification (2024)
The Supreme Court of India, in Mineral Area Development Authority & Ors. vs. M/s Steel Authority of India (2024), settled the constitutional question on the nature of royalty — confirming that royalty is a contractual payment for the grant of mining rights, not a tax. This ruling effectively reinforced GST applicability on royalty, closing any prior argument that royalty itself was a tax and therefore outside the GST net.
Post this ruling, GST authorities across India have been using it as a basis to initiate demands, particularly for FY 2019–20 onwards.
ℹ️ Key Point: GST on mining royalty is not a new development in 2026. The liability existed from July 2017. What is new is the aggressive enforcement. Contractors with pending compliance gaps are strongly advised to seek professional advice immediately.
3. Understanding Reverse Charge Mechanism (RCM) on Royalty
Under the standard GST mechanism, the supplier of a service charges GST from the recipient and deposits it with the government. However, under Reverse Charge Mechanism (RCM) — specified in Section 9(3) of the CGST Act, 2017 — this obligation is reversed. The recipient of the service must self-assess and deposit the GST directly.
In the context of mining royalty, the process works as follows:
Step 1: The State Government grants a mining lease and provides the right to mine minerals (this is the "service").
Step 2: The mining contractor pays royalty to the government periodically based on the quantity of mineral extracted.
Step 3: On the royalty amount paid, the contractor must self-assess and pay 18% GST under RCM — directly to the Central Government.
Step 4: This RCM liability must be declared in GSTR-3B under the section "Tax on supplies received on reverse charge basis."
Step 5: The contractor may claim Input Tax Credit (ITC) on the RCM GST paid, subject to the conditions under Section 16 of the CGST Act and Rule 36 of the CGST Rules.
Common Compliance Failures
The two most common failures observed in enforcement proceedings in 2025–26 are:
- Non-payment of GST under RCM — the contractor paid royalty to the state but did not pay the associated 18% GST to the Centre.
- Non-disclosure in GST returns — the royalty transaction was neither reported in GSTR-1 (outward supplies by the government, treated as deemed supply) nor in GSTR-3B (where the contractor should self-report RCM liability).
Both failures together constitute a serious violation and attract not just the base tax demand but also interest under Section 50 and penalty under Sections 73 or 74 of the CGST Act.
4. A Typical GST Enforcement Pattern in the Mining Sector (2025–26)
Based on multiple proceedings observed across India in 2025 and 2026, the following enforcement pattern has emerged:
|
Stage |
What Happens |
|
Detection |
GST department cross-references data from State Mining Departments with GSTR-1 and GSTR-3B filings |
|
SCN Issuance |
A consolidated Show Cause Notice is issued covering multiple financial years (commonly FY 2019–20 to 2023–24) |
|
Tax Demand |
Original tax demand is computed at 18% of total royalty paid across all years |
|
Penalty |
Department invokes Section 74 (fraud/suppression) — attracting 100% penalty, doubling the total demand |
|
Timeline |
Proceedings often run 6–12 months before an order is passed; many conclude ex-parte when the contractor lacks proper representation |
|
Final Order |
Ex-parte orders are common, with the total demand (tax + interest + penalty) being 2 to 3 times the base tax |
⚠️ Important: An ex-parte order does not mean the matter is closed. Appeal remedies remain available and are strongly recommended.
5. What GST Provisions Are Commonly Violated?
The following three provisions of the CGST Act, 2017 are most commonly cited in Show Cause Notices issued to mining contractors:
|
Section |
Provision |
Nature of Violation |
|
Section 9(3) |
Reverse Charge Mechanism |
Failure to pay GST on royalty under RCM |
|
Section 37(1) |
Furnishing of Outward Supplies — GSTR-1 |
Non-disclosure of royalty supply in GSTR-1 |
|
Section 39 |
Furnishing of Monthly/Quarterly Returns — GSTR-3B |
Non-reporting of RCM liability and non-payment of tax in GSTR-3B |
Additionally, the department typically invokes:
- Section 74(5) — demand notice in cases alleged to involve suppression or fraud
- Section 122(2)(b) — penalty for failure to pay tax under RCM
- Section 50 — interest on delayed payment of GST
6. Section 73 vs Section 74: Why the Distinction Is Critical
This is arguably the most important legal issue in any mining RCM enforcement proceeding. The two sections provide different tracks for demand — and the consequences differ enormously.
|
Parameter |
Section 73 |
Section 74 |
|
Applicable When |
Genuine error, oversight, or ignorance — no fraud |
Fraud, wilful misstatement, or suppression of facts |
|
Limitation Period |
3 years from due date of annual return |
5 years from due date of annual return |
|
Minimum Penalty |
10% of tax demanded (minimum ₹10,000) |
100% of tax demanded (equal to the full tax amount) |
|
Burden of Proof |
Department must prove non-payment |
Department must additionally prove fraudulent intent |
|
Reduced Penalty Option |
Available (pay before SCN, before order, etc.) |
Available at reduced rates if paid at specific stages |
Why Section 73 Should Apply in Most Mining RCM Cases
In the vast majority of mining RCM cases, the non-payment of GST arose due to:
- Unawareness of RCM applicability on royalty payments
- Consultant oversight or incorrect professional advice
- Ambiguity in GST law interpretation (especially before the 2024 Supreme Court ruling)
None of these constitute fraud, wilful misstatement, or suppression as required to invoke Section 74. The burden of establishing fraudulent intent lies squarely on the department — and in most cases, no such evidence is placed on record.
If the department has invoked Section 74 without establishing fraud, the contractor has a strong ground to argue that Section 73 should apply — reducing the penalty from 100% to 10% of the tax demand. This argument alone can significantly reduce the total liability.
7. Key Grounds of Appeal Available to Mining Contractors
If a GST order has been passed — whether after hearing or ex-parte — an appeal under Section 107 of the CGST Act must be filed before the GST Appellate Authority within 3 months of the order (extendable by 1 month for sufficient cause).
The following are the strongest grounds typically available:
Ground 1 — Violation of Principles of Natural Justice If the department relied on data or documents from the Mining Department without sharing them with the contractor for verification, the proceeding is vitiated. A taxpayer has a fundamental right to know the case against them and to respond. An adverse order passed without providing this opportunity is liable to be set aside.
Ground 2 — Wrong Invocation of Section 74 (Fraud) Instead of Section 73 Where no evidence of fraud or wilful suppression has been placed on record by the department, invoking Section 74 is legally impermissible. The demand and penalty must be recomputed under Section 73, with the lower applicable penalty rate.
Ground 3 — Limitation Period: Demand for Older Years is Time-Barred Under Section 73(10), an order must be passed within 3 years from the due date of the annual return for the relevant financial year. For FY 2019–20 (annual return due: 31-03-2021) and FY 2020–21 (annual return due: 31-03-2022), the limitation period has expired — and any demand for these years is time-barred and must be quashed.
Ground 4 — Consolidated SCN for Multiple Years is Legally Challenged The issuance of a single consolidated SCN covering multiple financial years (e.g., FY 2019–20 to FY 2023–24) is under active challenge before multiple High Courts. A contractor who receives such a notice has a strong argument that the consolidation prejudices their right to adjudication within the statutory timeline for each individual year.
Ground 5 — Ex-Parte Order — Sufficient Cause for Non-Appearance Where an order has been passed ex-parte, the contractor can demonstrate sufficient cause for non-appearance (e.g., lack of adequate notice, medical emergency, change of consultant, administrative oversight) and seek a fresh hearing. Many ex-parte orders are set aside at the appellate stage on this ground alone.
Ground 6 — Documents Relied Upon Were Not Furnished to the Contractor If the GST authority used information received from another government department (such as the Mining Department) to quantify the demand, but did not furnish that information to the contractor before passing the order, this constitutes a serious procedural irregularity and vitiates the assessment.
8. Important High Court Judgments on Consolidated SCN (2025–2026)
The issue of consolidated Show Cause Notices covering multiple financial years is currently one of the most actively litigated questions in GST law. The following judgments are directly relevant:
Parinee Realty Pvt. Ltd. vs. Union of India Bombay High Court · 17 April 2026 The Court held that issuing a consolidated SCN covering various financial years causes prejudice to the assessee. When a single SCN clubs multiple years, the assessee is denied the full adjudication period that the statute envisages for each individual year — particularly where the limitation applicable to an earlier year circumscribes the proceedings for later years.
M/S Pramur Homes and Shelters vs. Union of India Madras High Court · 11 December 2025 The Madras High Court reiterated that limitation under Sections 73(10) and 74(10) operates year-wise. A consolidated SCN cannot be used to revive demands for periods where the limitation has already expired. The limitation for each financial year must be computed independently.
Min Chem India vs. Union of India Bombay High Court · 17 April 2026 The Bombay High Court referred the following question to a Larger Bench:
"Whether Section 73(10) and Section 74(10) of the CGST Act prohibit the issuance of a single consolidated Show Cause Notice for multiple financial years/tax periods?"
The Court directed that all interim orders passed in favour of assessees in connected matters shall continue until the Larger Bench decides the issue.
Practical Impact for 2026: Any contractor who has received a consolidated SCN and is facing an adverse order can now rely on this Larger Bench reference to seek a stay of demand before the Appellate Authority, pending the final decision of the Bombay High Court.
Q: Is GST on mining royalty applicable from FY 2019–20 or earlier?
The GST obligation on royalty paid under mining leases — through RCM under Section 9(3) — has technically been applicable since GST came into force on 1 July 2017. However, most enforcement proceedings initiated in 2025–26 cover the period from FY 2019–20 onwards, and the limitation period bars demands for some earlier years in many cases.
Q: Does the mining contractor or the state government pay GST on royalty?
Under RCM, the mining contractor (recipient of the mining service) is required to pay the GST. The state government, as the supplier of mining rights, does not collect or pay this tax. The contractor must self-assess and deposit the tax, and declare it in their GSTR-3B.
Q: Can a contractor claim ITC on GST paid under RCM on royalty?
Yes, subject to conditions. If the mineral extracted is used in the course or furtherance of business, and all conditions under Section 16 of the CGST Act are satisfied, Input Tax Credit (ITC) can be claimed on the RCM GST paid. This can substantially reduce the net cash outflow.
Q: What is the maximum penalty for non-payment of RCM on royalty?
Under Section 73 (genuine oversight — no fraud): minimum 10% of tax, maximum 10% of tax demanded. Under Section 74 (fraud/suppression): 100% of the tax demanded. The applicable section and penalty quantum is a key ground of dispute in most proceedings.
Q: A GST order has been passed ex-parte against me. What should I do?
File an appeal before the GST Appellate Authority under Section 107 of the CGST Act within 3 months of the order date (extendable by 1 month). Simultaneously, apply for a stay of the demand. Present a detailed chronology explaining why the ex-parte hearing occurred and seek a fresh opportunity. Consult a qualified GST advocate immediately.
Q: Can demands for FY 2019–20 be challenged on limitation grounds?
Yes, this is a strong ground. Under Section 73(10), the order must be passed within 3 years from the due date of the annual return for that financial year. For FY 2019–20, the annual return was due by 31-03-2021 — meaning the last date for an order under Section 73 was 31-03-2024. A demand for this year passed after that date is time-barred.
Q: Is it advisable to pay the tax demand and then appeal?
In many cases, paying the base tax and interest (without penalty) before the appeal is decided can demonstrate bona fide intent and may result in a waiver of penalty. However, this is a strategic decision that depends on the specific facts of the case, the availability of ITC, and the strength of the legal grounds. Professional advice is essential before making this decision.
GST enforcement in the mining sector is one of the defining compliance challenges of 2026. The legal position on RCM applicability on mining royalties is settled and clear. However, the manner in which proceedings have been conducted — consolidated SCNs, ex-parte orders, invocation of Section 74 without evidence of fraud, and use of third-party data without disclosure — has created significant room for legal challenge.
Mining contractors who have received Show Cause Notices or adverse orders should not treat these as final. Well-structured appeals, grounded in the legal provisions and supported by the High Court judgments discussed above, offer meaningful prospects of relief — whether by way of quashing time-barred demands, reducing penalties from 100% to 10%, or obtaining a stay of demand pending the Larger Bench decision.
Recommended Action Steps for Contractors Facing GST Proceedings in 2026
- Check the order date and compute the appeal deadline — Section 107 appeal must be filed within 3 months of the order, extendable by 1 month.
- Identify whether the demand covers years where limitation has expired — FY 2019–20 and FY 2020–21 are potentially time-barred under Section 73.
- Verify whether Section 74 (fraud) was invoked — if so, challenge the invocation; argue for Section 73 and the lower 10% penalty.
- Compile all royalty payment receipts and mining lease documents — these are essential for both the appeal and for computing the correct tax liability.
- Check whether a consolidated SCN was issued — if yes, cite the Larger Bench reference in Min Chem India vs. Union of India to seek a stay.
- Consult a qualified GST Advocate or Chartered Accountant — given the complexity of the legal issues involved, professional representation is strongly recommended before the Appellate Authority and, if necessary, before the High Court.
This article is authored by a team of legal and tax professionals for general awareness purposes only.
In compliance with the Bar Council of India Rules (Part VI, Chapter II — Standards of Professional Conduct and Etiquette), this publication does not constitute legal advertising, solicitation, or a claim of specialisation. No advocate-client relationship is created by reading this article. All legal matters require independent professional advice based on specific facts and circumstances. Readers are advised to consult a qualified Advocate enrolled with the appropriate Bar Council for legal advice pertaining to their individual matter.
