However, financial advisory firm Ambit Capital, citing precedent, argues that there is a silver bullet that could somewhat minimise the net impact of future quotas on companies.
The financial advisory firm says the Union government can reduce the royalty rate on mining to compensate companies.
“And there is a good precedent for this. When the India Cement judgment took away the power of states to levy taxes, the Union government increased royalty rates manifold in 1991 to compensate states for the losses. And that is why we have the royalty rates where they are today,” Ambit Capital said.
Should states begin collecting taxes retroactively, Ambit Capital said there is no need for royalties at the current rate.
“The Union government can easily reduce these rates. That does not even require Parliamentary approval.” “Interestingly, since WB (West Bengal) has been collecting mining taxes all these years, it is the only state to be deprived of the enhanced royalty rate that was allowed in 1991. That is as clear a precedent as any needed. Therefore, the net impact on companies of future dues would likely be minimal,” Ambit Capital said. On August 14, the Supreme Court ruled that mineral-rich states can collect arrears of royalties and taxes on mines and mineral-bearing lands since April 1, 2005, from both the Centre and mining lease holders.
A nine-judge constitutional court has ordered that the arrears be paid in stages over the next 12 years, starting from April 1, 2026.
On Monday, Fitch Ratings said that operating costs of Indian mining companies are likely to increase significantly if states impose additional mining taxes, as allowed by the Supreme Court in the recent ruling.
At the same time, Fitch expects a limited financial impact on mining companies, as payment of overdue debts will be made in stages over a long period of 12 years.
S&P Global Ratings had earlier said a change in the tax landscape for mining companies would have a pass-through effect on steel and other industries and ultimately on the Indian consumer.
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