Mining Data Meets GST Enforcement- CBIC’s Instruction GST Opens a New Front for the Mining Sector

Mining Data Meets GST Enforcement- CBIC’s Instruction GST Opens a New Front for the Mining Sector

 Chartered Accountant | Founding Partner, Sashthi Taxlegal Advisory Services LLP GST Litigation • Advisory • Appellate Representation | Hosur • Bengaluru

Introduction

The Central Board of Indirect Taxes and Customs (CBIC), through its GST-Investigation Wing, has issued Instruction No. 01/2026-GST dated 03.08.2026, directing all CGST Zones to establish a formal, institutionalised mechanism for coordination with State Mining Authorities. The trigger for this Instruction is the Draft Performance Audit Report of the Comptroller and Auditor General of India (C&AG) on “Assessment, Levy and Collection of GST on Minerals.”

While the Instruction is administrative in character and addressed to departmental formations, its practical consequences will be felt squarely by taxpayers in the mining, quarrying, stone-crushing, and mineral transportation sectors. This article examines the contours of the Instruction and its litigation and compliance implications.

Background: The C&AG’s Observation

The C&AG’s audit observed that State Mining Authorities routinely detect a range of violations under the mining laws-instances of illegal mining, illegal transportation of minerals, seizure of minerals and vehicles, cancellation or suspension of mining leases, and extraction of minerals in excess of permitted quantities.

Each of these events carries potential GST implications. Illegal or excess extraction may indicate suppression of taxable outward supplies; unregistered operators may point to non-registration; undervalued despatches may signal short payment of tax. Yet, the audit found that there was no structured or periodic mechanism for this enforcement intelligence to flow from the State Mining Departments to the CGST field formations. Valuable information was, in effect, lying unused for GST enforcement purposes.

What the Instruction Directs

The Board has now directed all Principal Chief Commissioners and Chief Commissioners of CGST Zones to ensure the following:

1. Nodal Officer in every Zone – Each CGST Zone must designate a Nodal Officer for coordination with the respective State Mining Department.
2. Perlodic information-sharing mechanism – A formal mechanism must be established with the State Mining Authorities for periodic sharing of information relating to illegal mining and transportation of minerals detected within the jurisdiction.
3. Analysis and action Information received must be analysed for identification of GST implications, and action initiated wherever warranted under the CGST Act, 2017 and the rules made thereunder.

4. Dissemination of intelligence – Intelligence generated from such information is to be disseminated to jurisdictional Commissionerates and DGGI formations for further necessary action.
5. Review meetings – Periodic meetings with the State Mining Authorities are to be held to review the effectiveness of the mechanism and resolve operational issues.

Field formations have been directed to circulate the Instruction for strict compliance.

Why This Matters: The Enforcement Landscape for Mining Taxpayers

The mining sector has already been at the centre of intense GST litigation-most prominently on the levy of GST under reverse charge on royalty and seigniorage fee paid to Government.

The royalty-RCM controversy: where it stands today. It is important to appreciate the correct legal position here. The Nine-Judge Constitution Bench decision in Mineral Area Development Authority v. Steel Authority of India (MADA) did not decide any GST issue. It was rendered in the context of legislative competence of the States to tax mineral rights, and in that context overruled the view in India Cement Ltd. v. State of Tamil Nadu that royalty is a “tax,” holding instead that royalty is a contractual consideration flowing from the mining lease. While the Revenue seeks to draw sustenance from this characterisation, MADA by itself does not conclude the distinct question under GST law – namely, whether the grant of mineral rights against royalty/seigniorage constitutes a taxable “supply of service” attracting reverse charge.

That precise question remains sub judice before the Supreme Court in the batch led by Udaipur Chambers of Commerce and Industry v. Union of India (SLP (C) No. 37326 of 2017]. The Rajasthan High Court had held on 24.10.2017 that royalty is nothing but “consideration” and that mining operations under a lease constitute a “service”; in the SLP against that ruling, the Supreme Court, by order dated 11.01.2018, issued notice and directed that payment of service tax for grant of mining lease/royalty shall remain stayed until further orders and the taxability of royalty as consideration for a service, under service tax and GST alike, has remained at large ever since.

Taking note of this pendency, the Madras High Court has consistently protected assessees in a recent series of orders. In C. Kandasamy v. State Tax Officer (12.03.2026), a best-judgment assessment under Section 63 read with Section 74 on an unregistered quarry operator for GST on seigniorage/royalty under RCM was kept in abeyance pending the Supreme Court’s decision, subject only to a 10% security deposit. Inful. Manickavasagam S. (Madurai Bench, 05.06.2026), a Section 74 order on seigniorage was set aside and remanded, with the Court expressly declining to impose even the usual 25% deposit condition “since the very incidence of tax itself is at large,” and directing that final orders and enforcement remain in abeyance pending the Supreme Court’s judgment. Most recently, in Jagadeesan Suseela (30.06.2026), assessment orders imposing GST on seigniorage were set aside subject to the 10% already recovered, with implementation of fresh orders kept in abeyance pending the Supreme Court’s decision in the SLPs – and all attachments, including against the petitioner’s garnishee, were raised.

Instruction No. 01/2026-GST opens a second and distinct enforcement front. The Information now flowing to CGST formations will not concern royalty at all-it will concern the quantum and legality of extraction and despatch itself. The likely lines of enquiry that taxpayers should anticipate include:

• Turnover reconciliation with mining department records – Comparison of quantities permitted/despatched as per mining permits, transit passes, and e-permits against quantities declared in GSTR-1 and GSTR-3B. Any excess extraction recorded by the mining department may be treated as prima facie evidence of suppressed outward supply.
• Seizure and vehicle detention data – Seizures of minerals and vehicles by mining authorities may be cross-verified against e-way bill records, potentially triggering proceedings under Sections 129/130 as well as demand proceedings under Sections 73/74.
• Lease cancellation and suspension events – Cancellation of a mining lease may prompt scrutiny of the period of operation, registration status, and tax paid during the disputed period.
• Unregistered operators Persons found engaged in extraction or transportation without GST registration may face registration, demand, and penalty proceedings.
• ITC verification down the chain – The Instruction expressly refers to wrongful avallment of input tax credit, indicating that respients of minerals from tainted sources may also come under the scanner-arrarea where Section 16(2)(c) jurisprudence will assume importance.

The Extended Period Question

A critical litigation dimension deserves attention. Where demands are raised based on mining department data pertaining to earlier financial years, the Department is likely to invoke Section 74 alleging suppression with intent to evade. Taxpayers will need to contest whether:

• discrepancies between mining records and GST returns, without more, satisfy the threshold of fraud, wilful misstatement, or suppression of facts with intent to evade required for the extended period;
• quantity estimates by mining authorities (often based on volumetric surveys or assessments made for mining-law penalties) can straightaway be adopted as the measure of “taxable supply under GST without independent corroboration of actual supply, consideration, and recipient;
• mining-law violations, which are penalised under the mining statutes, can be mechanically transposed into GST evasion findings.

These will be fertile grounds of defence, and the quality of contemporaneous documentation permits, transit passes, weighbridge records, despatch registers, and reconciliation statements-will be decisive.

Practical Takeaways for Mining and Allied Businesses

1. Reconcile proactively. Undertake an annual reconcillation of quantities as per mining department returns/permits with quantities declared in GST returns, and document reasons for variances (handling loss, moisture, stock accretion, captive consumption, etc.).
2. Preserve transit and weighment records. Transit passes, e-way bills, and weighbridge slips should be preserved and mapped, as these will be the first documents called for in any cross-verification exercise.
3. Respond to mining department proceedings with GST in mind. Admissions or compounding under mining laws may be quoted back in GST proceedings. Responses before mining authorities should be drafted with awareness of their downstream GST consequences.

4. Review registration coverage. Entities operating quarries, crushers, or transport fleets across locations should review whether registrations, additional places of business, and e-way bill compliance are complete.
5. Vendors matter. Recipients purchasing minerals should strengthen vendor due diligence, given the express reference to wrongful ITC avallment in the Instruction.

Conclusion

Instruction No. 01/2026-GST is a classic instance of inter-departmental data convergence a trend that has steadily intensified, with GST authorities already drawing on income-tax data, banking information, and e-way bill analytics. The mining sector – where the very taxability of royalty under GST is yet to attain finality before the Supreme Court, and where the Madras High Court has kept enforcement in abeyance – must now simultaneously prepare for a parallel wave of enforcement action founded on mining department intelligence relating to quantity and legality of extraction.

The Instruction itself creates no new levy and confers no new power; the action it contemplates must still conform to the substantive and procedural discipline of the CGST Act-proper determination of taxable supply, valuation in accordance with Section 15, adherence to the limitation scheme of Sections 73 and 74, and observance of natural justice. Taxpayers who maintain robust quantitative records and reconcile them periodically will be best placed to meet this new wave of scrutiny.

This article is for general information only and does not constitute professional advice. For specific guidance, please contact Sashthi Taxlegal Advisory Services LLP, Hosur. Bengaluru