SC ruling-empowers the states; marginal negative impact
The Supreme Court (SC) has ruled that a state can levy taxes on mineral rights and clarified that it would be applicable from 2005. We believe the states can levy additional taxes but would need to be rational to ensure investments and job creation in states. Further, the center could potentially intervene to protect the federal structure and maintain uniformity. The liabilities would get crystalized in due course on case-by-case basis and we see only a marginal negative impact on coverage companies. Non-integrated companies like JSP, JSTL are better than integrated ones-TATA and SAIL.
SC-confirms state's power to levy additional taxes on mineral rights
A nine-judge SC bench ruled on July 24, 2024 that that royalty is not a tax, and the MMDR (Mines and Minerals (Development and Regulation)) Act,1957 does not limit states' powers to levy a tax above royalty paid by mining companies on mineral rights/mineral bearing lands. Subsequently, the SC judgement on August 14 rejects prospective applicability of this judgement.
Retrospective application is conditional diluting the potential impact
The apex court has however, clarified that the levy of taxes by states is subject to a few conditions: (1) the levy is not applicable for periods before April 1, 2005, (2) the tax arrears can be paid over 12 years starting April 1, 2026 and (3) there should not be levy of interest or penalty for demands made before July 25, 2024.
Limited impact on the basis of disclosures by impacted companies
We note that the SC judgement settles a point of law, not individual cases and does not directly crystalize the liability of mining companies. The demand raised by states under different laws could be further litigated based on merits on a case-to-case basis. A few companies, for instance, Hindalco, have not received any demand whereas the disclosed contingent liability of a few, like TATA, could include interest and penalties, which is not admissible.
Prospective taxes to raise costs but center could intervene
Recently, Jharkhand has passed the "Jharkhand Mineral Bearing Land Cess Bill 2024", which proposes tax at the rate of Rs100/70/50/ton on coal and iron ore/bauxite/manganese and other ores. Other states could follow suit. However, states would have to balance tax revenues against investment attractiveness and job-creation opportunities. Also, different taxes of mineral across different states also defeats the federal structural of India and the center could potentially intervene, capping the taxes or rights of the states through amendment in the MMDRA.
Non-integrated (JSP, JSTL) are better placed than integrated (TATA, SAIL)
We expect only a marginal negative impact (0-2% of market cap) on coverage companies given the conditions imposed by SC while allowing retrospective taxes. Imposition of taxes by other states, like Jharkhand, could increase CoP by 1%-2%. Converters like JSP and JSTL are better placed than integrated producers or miners like TATA, SAIL and NMDC.
Coal and power producers-could pass on higher taxes to end consumer
Coal India (CIL) pricing as per the FSA are on a mine-head basis, which implies that all incremental costs (including levies and taxes) are to be borne by the buyer. Accordingly, we do not see any earnings impact on the earnings of CIL on the basis of potential levies (prospective or retrospective). In terms of the buyers, most power generation companies as per their PPA have to pass on the cost of coal (including taxes and levies), while the terms of competitively bid PPAs the 'change of law' clause would allow for incremental compensation on the basis of additional levies. Merchant power capacities that enjoy free market pricing, would bear the brunt of such incremental cost of coal. |
