Mining for Minerals and GST Compliance amid Governance Gaps

By leveraging technology and strengthening data verification, the audit can help the mining sector to realizes full potential to drive growth.

By P SESH KUMAR

New Delhi, October 7, 2025 — The mining sector is a cornerstone of India’s economy, generating substantial revenue through royalties and Goods and Services Tax (GST). In the last three years alone, royalties and GST from the sector have contributed significantly to government revenues.

However, systemic issues, such as the lack of verification of production quantities, declared prices, and cost deductions in GST returns, undermine this revenue potential.

Economic Significance of Mining Revenues

The mining sector contributes significantly to India’s economy, providing essential inputs for industries such as steel, cement, and energy. The financial impact of the sector is reflected in its contribution to state and national revenues through royalties and Goods and Services Tax (GST).

Recent Trends in Mining Revenues

Over the last three years, revenues from the mining sector have shown an upward trajectory, despite the challenges posed by discrepancies and underreporting. The following table provides a summary:

Year	Royalty Revenue (Rs in crore)	GST Revenue (Rs in crore)
2019-20	16,867	1,01,844
2020-21	16,831	94,732
2021-22	38,840	1,23,608

Sources: Press Information Bureau and GST Council Reports.

These figures demonstrate the mining sector’s critical role in revenue generation. However, systemic governance issues, including the lack of robust verification mechanisms, significantly limit its revenue potential.

Governance Framework and Dual Responsibilities

The governance of the mining sector involves both Union and State Governments:

State Governments: Collect royalties based on production and sale values declared by lessees.

Union Government: Administers GST on mineral sales, relying on data from GST returns filed by lessees.

This dual responsibility necessitates seamless data sharing and reconciliation, which is currently inadequate, leading to revenue leakages.

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Minerals in India are classified into Major Minerals and Minor Minerals under the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act):

Major Minerals: Include high-value minerals like iron ore, coal, bauxite, and limestone for cement.

Minor Minerals: Include sand, stone, marble, and low-grade limestone used in construction.

Governance responsibilities are divided:

Union Government: Regulates major minerals, collects royalties, and oversees GST.

State Governments: Manage minor minerals, including local royalty collection.

This dual system necessitates robust intergovernmental coordination, which remains lacking.

Misclassification of Major and Minor Minerals

Misclassification is a significant governance issue. Some minerals, such as limestone, can fall into both categories depending on their grade and use:

Limestone for cement is a major mineral.

Limestone for construction is a minor mineral.

Unscrupulous lessees exploit these ambiguities to: (i) Report high-value minerals as lower-value categories to reduce royalties and GST, and (ii) Evade central oversight by declaring major minerals as minor to benefit from decentralized state regulation.

Inflated Costs and Deductions

Lessees often overstate costs such as transportation and processing to reduce taxable values. For instance, in Gujarat, limestone lessees reported transportation costs that were 40% higher than industry norms, reducing their GST liabilities.

Risks and Revenue Leakages

Royalty Leakages: Misclassification and undervaluation directly reduce royalty accruals. For example: Rajasthan lost ₹300 crore annually due to the misclassification of limestone as a minor mineral, as reported by CAG.

GST Losses: GST rates for major minerals (12-18%) are higher than for minor minerals (5%). Misclassification allows lessees to pay lower GST, leading to cumulative losses of ₹1,000 crore annually across states like Odisha, Chhattisgarh, and Gujarat.

Illegal Mining: Illegal mining activities bypass both GST and royalty frameworks. The absence of robust tracking mechanisms enables unregulated extraction and revenue leakages.

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Lack of Verification of Production Data

Mining lessees are required to report production volumes to state mining departments as well as Indian Bureau of Mines (IBM) and declare these in their GST returns. However, no systematic mechanism or co-ordination exists to verify whether the production quantities reported to mining departments or IBM match those declared in GST returns.

Discrepancies in Sale Prices

Declared sale prices often fall significantly below market rates. This undervaluation leads to reduced royalties and GST liabilities. The following table illustrates such discrepancies:

State	Mineral	Reported Sale Price (Rs/Tonne)	Market Price (Rs/Tonne)	Undervaluation (%)
Odisha	Iron ore	2200	3000	27
Chattisgarh	Coal	1500	2100	29
Rajasthan	Gypsum	700	1200	42
Gujarat	Limestone	400	600	33
Jharkhand	Coking coal	1800	2300	22

Questionable Cost Deductions

The absence of scrutiny over cost components used to calculate sale prices allows lessees to reduce taxable values artificially. Common practices include:     Inflating costs for transportation, processing, and handling; Overstating deductions without supporting documentation.

Sample Analysis: Data Discrepancies

To illustrate the scale of governance gaps, the table below compares production volumes, declared sale prices, and GST returns for key mineral-producing states:

State	Mineral	Production (MT)	Declared Sales Value(Rs in crore)	Actual Sales Revenue (Rs in crore)	Revenue loss (Rs in crore)
Odisha	Irone ore	220	4840	6600	1000
Chattisgarh	Coal	190	2850	3990	800
Gujarat	Limestone	90	360	540	150
Rajasthan	Gypsum	125	875	1500	120
Jharkhand	Coking coal	160	2880	3680	350

Absence of Quantity Verification

No reconciliation exists between production data submitted to state mining departments and volumes reported in GST returns. For example: In Odisha, iron ore production reported to the mining department exceeded GST-declared volumes by 15%.

Undervaluation and Inflated Costs

Undervaluation of prices, as observed in Chhattisgarh and Gujarat, reduces both royalty and GST liabilities.

Inflated cost deductions in limestone and gypsum transactions further erode taxable values.

The lack of technological tools for real-time monitoring allows these discrepancies to persist, particularly in states with extensive mineral reserves.

Recommendations for a Performance Audit

A performance audit by the CAG is critical to addressing these governance gaps. Key focus areas should include:

Data Reconciliation: Compare production volumes reported to mining departments with sales declared in GST filings.

Identify mismatches in declared prices using market benchmarks.

Verification of Costs and Deductions: Audit cost components such as transportation, processing, and handling to detect inflated claims.

Adoption of Technology: Satellite Monitoring: Validate production data against satellite imagery.

Blockchain: Ensure traceability of mineral transactions from extraction to sale.

Policy Reforms: Mandate dynamic pricing models for minerals to prevent undervaluation.

Standardize reporting formats across states and GST authorities.

Royalties, Revenues, and Recalibration

The mining sector’s critical contribution to royalties and GST revenues is undermined by systemic governance gaps. Discrepancies in production data, undervaluation of sales, exploitation of differences in grades and rates of royalty/GST on minerals and questionable cost deductions result in substantial revenue losses. The subject is eminently suitable for a performance audit by CAG to identify these issues and recommend systemic improvements.

By leveraging technology and strengthening data verification, the audit can help ensure that the mining sector realizes its full potential as a driver of economic growth.

(This is an opinion piece, and views expressed are those of the author only)

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