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The Supreme Court’s decision permits states to impose taxes on mineral rights and mineral-bearing lands and to seek refunds of royalties from April 1, 2005, onwards
Metal and mining firms such as Tata Steel and JSW Steel may witness a notable rise in their operating expenses if state governments enforce new mining taxes, which the Supreme Court has recently applied retroactively.
According to a Fitch Ratings report, these companies could encounter greater risks due to a prolonged decline in their ebitda margins resulting from these taxes. Additionally, with only limited scope to pass on the potential cost increases, metal and mining companies are expected to be more adversely affected by this ruling compared to power and cement sectors, according to a report by The Economic Times.
Fitch Ratings expects that Tata Steel’s limited rating headroom will expose it to increased credit risks from potential taxes compared to JSW Steel. For FY21-FY24, Tata Steel’s average ebitda is projected to be about 9 per cent lower, and its ebitda leverage is expected to be approximately 0.3x higher if it were to classify the state-imposed taxes from Odisha as operating expenses rather than contingent liabilities, the report stated.
Regarding the impact of past dues, Fitch Ratings foresees a smaller effect on JSW Steel compared to Tata Steel. This is due to JSW Steel’s smaller scale of mining operations and shorter ownership period of mining assets. As of June 2024, Tata Steel had accumulated contingent liabilities totalling Rs 17,300 crore with the state of Odisha, the report added.
In a report, Fitch Ratings said, “We believe additional state taxes on coal will lead to an increase in electricity prices, as fuel cost changes are passed through to consumers under the power purchase agreements of most of the domestic coal-based power plants, and more than two-thirds of India’s power generation remains coal-based. The higher prices should quicken the pace of investments and growth in renewable power generation.”
Supreme Court ruling on mining taxes
On July 25, the Supreme Court delivered an 8:1 verdict affirming that the authority to tax mineral rights resides with the states, reversing a 1989 decision that had allocated this power solely to the Centre.
Industry experts have cautioned that this ruling on mining royalties could significantly impact the Indian mining industry, potentially resulting in financial liabilities of Rs 1.5-2 trillion in back payments dating from April 2005. The court’s decision permits states to impose taxes on mineral rights and mineral-bearing lands and to seek refunds of royalties from April 1, 2005, onwards.
The decision is expected to have a profound effect not just on the mining sector but on the entire supply chain, potentially leading to considerable inflationary pressures on final products, the report said.
The Federation of Indian Mineral Industries (FIMI) has pointed out that the Indian mining sector is already burdened with some of the highest taxes globally.
BK Bhatia, Additional Secretary General of FIMI, said the Supreme Court’s ruling has granted states extensive powers to impose various taxes and levies.
“Now this order of August 14 mandating collecting dues retrospectively with effect from April 1, 2005, will give further jolt to the Indian mining industry as arrears may work out to the tune of more than Rs 1.5 trillion to Rs 2 trillion and the mines in the states like Odisha and Jharkhand would be most affected,” Bhatia told news agency PTI.
(With agency inputs)
First Published: Aug 20 2024 | 4:10 PM IST
