Mining Tax Ruling By SC Could Hit Wide Range Of Producers: S&P

A shifting tax landscape for mining companies in India will have a pass-on effect on steel and other industries, and ultimately on the Indian consumer, asserted S&P Global Ratings.

This comment from the global credit rating followed the July 25 Supreme Court ruling that granted state governments the power to tax mineral resources and clarified that royalties paid by miners do not qualify as taxes.

"The ruling might elevate production costs, affecting miners' profitability and future investments," said S&P Global Ratings credit analyst Anshuman Bharati.

"This in turn could reverberate to sectors that consume these materials, such as steel, aluminium, cement, oil and gas, and coal," Bharati said..

While it is unclear whether all states will impose such taxes or at what rate, increased mineral prices due to these taxes will raise costs for consumers and downstream industries, the rating agency said in a note on Wednesday.

The ability of steel companies to pass on the rising costs to the end users will depend on the strength of the steel cycle, S&P remarked. At present, domestic steel prices are very close to the cost of Chinese imports. Any further increase could exacerbate the threat of imports, it observed.

Based on S&P estimates, a 15 per cent tax on iron ore, if applied uniformly across states, could increase the per ton cost of steel by Indian rupee Rs 1,500 (USD 17.8), all else being equal.

"We see aggregate debt for leading steel producers increasing to multi-year peak levels under a stress scenario," S&P added.

Any retrospective application of the court ruling could lead to disputes and litigation as mining companies grapple with additional tax liabilities.

"The court is yet to provide clarity on this matter. The increased tax burden and regulatory uncertainty may deter future investments in the sector," the rating agency asserted.

The Supreme Court on July 31 reserved its order on the issue of whether its July 25 judgement upholding the power of States to levy tax on mines and minerals bearing would be applied retrospectively.

The nine-judge bench will decide whether the royalty levied by the Centre on mines and mineral-bearing lands since 1989 will be refunded to the States.

On July 25, a nine-judge Constitution bench headed by Chief Justice D Y Chandrachud, by a majority 8:1 verdict, had held that States have the power to levy tax on mines and minerals- bearing lands and also ruled that royalty payable on extracted mineral is not a tax.

Solicitor General Tushar Mehta, appearing for the Centre argued that making the July 25 verdict retrospective will have cascading effects on prices, and ultimately the common man would bear the brunt, as almost all industries are dependent on minerals.

The Solicitor General asked the bench to clarify that the judgment will not enable recoveries for the period before the date of pronouncement.

The industry is also seeking clarity on the retrospective application of this ruling.

(ANI)