GST on Royalty: NHAI Prescribes Interim Mechanism Pending SC Adjudication

The National Highways Authority of India (NHAI), vide Policy Circular No. 2.5.18/2026 dated September 5, 2026 (the “Circular”), has prescribed an interim procedure for processing claims relating to reimbursement/release of Goods and Services Tax (GST) on royalty paid in respect of minor minerals used for highway projects, pending final adjudication by the Hon’ble Supreme Court on the applicability of GST/Service Tax on royalty. The Circular follows NHAI’s earlier Policy Circular Nos. 2.5.11/2019 dated May 17, 2019, and 2.5.17/2025 dated March 13, 2025, concerning reimbursement/recovery of royalty under the Change in Law provisions of Engineering Procurement and Construction (EPC)/Design Build Finance Operate Transfer (DBFOT) contracts.

The issue is pending before the Hon’ble Supreme Court in Udaipur Chambers of Commerce and Industry & Ors. v. Union of India & Ors., Civil Appeal No. 10560 of 2025, arising from SLP (Civil) No. 37326 of 2017. The Circular notes that, pursuant to the interim order dated January 11, 2018, payment of service tax on royalty for grant of mining leases has remained stayed pending further orders.

The Circular provides the following mechanism:

1. where GST-TDS has already been deducted by NHAI and the corresponding GST liability has crystallized, the GST amount may be released to the Concessionaire/Contractor, subject to verification of actual royalty payment, verification of payment/discharge of GST and supporting documents, and submission of an unconditional Indemnity Bond in the prescribed format; and
2. where GST-TDS has not been deducted and the corresponding GST liability has not crystallized, the claim shall remain pending until final adjudication by the Hon’ble Supreme Court.

The Circular expressly clarifies that GST-TDS on royalty shall not be deducted by NHAI’s Regional Offices, PIUs and Field Units until final adjudication. The interim mechanism is therefore intended only to process cases where GST-TDS had already been deducted as on the date of the Circular.

The Indemnity Bond prescribed as Annexure-I requires the Concessionaire/Contractor to refund the GST amount released by NHAI, together with applicable interest, if the final decision holds that GST/Service Tax on royalty is not payable, leviable or reimbursable, in whole or in part. Such refund is required within 7 working days from the earlier of the date of the final judgment or NHAI’s written demand.

If the amount is not refunded within the prescribed period, Clause 4.1 of the Indemnity Bond permits NHAI to recover or adjust the amount from sums payable to the Concessionaire/Contractor under the Agreement or any other agreement or project with NHAI, including Annuity Payments, O&M Payments, Bonus Payments, Retention Money, Performance Security/Security Deposit, Escrow Account balances and amounts payable pursuant to arbitral awards or court decrees. This recovery right survives completion, termination or expiry of the underlying Agreement until the recoverable amount is realised in full.

Releases under the mechanism remain subject to the final judgment and any subsequent policy decision of NHAI.