Steel tax: According to a report by rating agency ICRA, the recent Supreme Court ruling allowing certain states to levy a new tax on mining will aggravate the problems of the ailing domestic steel industry. The August 14 verdict has upheld the right of state governments to tax mining rights and the lands where they are produced, while allowing states to retrospectively claim back royalties paid on or after April 1, 2005.This move is likely to reduce margins across the steel sector, including those of both primary and secondary steel producers. As per ICRA analysis, primary steel makers are likely to see their operating margins reduced by as much as 60-180 basis points. For secondary producers, if this trend hurts them more, the fall in margins could be 80-250 basis points, depending on tax rates of 5% to 15%.In short, the impact of the new mining tax will not be limited to the steel industry. The impact on the energy sector, which is heavily dependent on coal, will likely increase the cost of supply by 0.6 to 1.5 percent, which will be passed on to the consumer in the form of higher electricity tariffs. The largest energy consumers (besides steel) are the main producers of aluminum.“The new mining tax imposed by key mineral-rich states could further add to the cost pressure of the steel industry. Most key states are yet to specify the rates. Industry watchers said any significant tax on the key raw material is likely to put huge pressure on already stressed margins, especially of secondary steel producers as most of them are merchant miners who are now likely to pass on the increased costs,” said Girishkumar Kadam, Senior Vice President and Head, Corporate Sector Ratings Group, ICRA.The Supreme Court judgment has again put the spotlight on the Orissa Rural Infrastructure and Socio-Economic Development Tax Act, 2004, which seeks to empower the state government to levy a 15 per cent tax on iron ore and coal. If fully implemented, it would make iron ore more expensive by 11 per cent, further affecting the country’s steel makers on the cost front.In a related development, the Jharkhand government has also increased royalties on iron ore and coal by Rs 100 per tonne, which may set a model for other states to follow. The impact on steel producers’ margins is expected to be relatively small at 30-40 basis points.
With PTI inputs
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