Supreme Court Verdict Spurs Tax Debate Among Mining Experts

The Supreme Court's decision to allow states to levy backdated taxes on mining has led experts to predict a rise in operating costs for Indian mining firms. Ambit Capital suggests reducing royalty rates to offset the financial impact, while Fitch Ratings highlights a staggered payment plan mitigating severe immediate repercussions.

Ever since the Supreme Court ruled that states can levy taxes on mining retrospectively from April 1, 2005, experts have predicted a significant rise in the operating costs for Indian mining companies. Financial advisory firm Ambit Capital, however, suggests a potential remedy by arguing that the Union Government could lower royalty rates to minimize the impact of prospective dues.

Ambit Capital notes a precedent where the Union Government adjusted royalty rates to compensate states after the landmark India Cement judgment. This decision stripped states of their power to levy taxes but saw royalty rates spike in 1991 to balance their financial loss. The firm believes a similar approach could be effective now.

The potential reduction in royalty rates wouldn't require Parliament's approval, according to Ambit Capital. They also pointed out that West Bengal, which has been collecting mining taxes over the years, didn't benefit from the enhanced royalty rates of 1991. This example underscores their argument for minimal net impact on companies from prospective dues.

On August 14, the Supreme Court ruled that mineral-rich states can collect past dues on royalties and taxes from April 1, 2005, both from the Central Government and mining lease holders. A nine-judge Constitution bench directed that these past dues be paid in a staggered manner over the next 12 years, starting April 1, 2026.

Fitch Ratings commented on Monday that while Indian mining companies' operating costs are likely to rise with new taxes, the staggered payment plan helps mitigate severe immediate financial impacts. S&P Global Ratings had also previously cautioned that changes in the tax landscape for mining firms could pass through to steel and other industries, eventually affecting Indian consumers.

(With inputs from agencies.)