Metal and mining companies like Tata Steel and JSW Steel could face significant increase in their operating costs if state governments impose additional mining taxes which were recently made applicable retrospectively by the Supreme Court.
As per a Fitch Ratings report, companies could face increased risks from sustained weakening of their EBITDA margins because of the said levies. Furthermore, given limited headroom in passing on the potential increase in operating costs, metal and mining companies stand to face a higher impact from the ruling in comparison to power, cement companies.
SC ruling’s effect on companies
Fitch Ratings expects Tata Steel‘s low rating headroom to expose it to greater credit risks from the impact of prospective taxes when compared to JSW Steel. Tata Steel’s average EBITDA for FY21-FY24 is expected to be lower by around 9 per cent and its EBITDA leverage to be higher by around 0.3x, if it were to treat the respective year’s tax imposed by Odisha state as operating cost, instead of additional contingent liability.When it comes to the impact of past dues, Fitch Ratings expects the impact to be lower for JSW Steel than for Tata Steel, given the former’s lower scale of mining operations than TSL. In addition, it also has shorter ownership period of its mining assets. Tata Steel had Rs 17,300 crore worth of accumulated contingent liabilities to the state of Odisha as of June 2024.
“We believe additional state taxes on coal will lead to an increase in electricity prices, as fuel cost changes are passed through to consumers under the power purchase agreements of most of the domestic coal-based power plants, and more than two-thirds of India’s power generation remains coal-based. The higher prices should quicken the pace of investments and growth in renewable power generation,” Fitch Ratings said in its report.
Make it retrospective: SC ruling on mining royalty
On July 25, the Supreme Court delivered an 8:1 verdict affirming that the power to tax mineral rights lies with the states, overturning a 1989 ruling that granted this authority exclusively to the Centre. Industry experts have warned that the Supreme Court’s ruling on mining royalties could deliver a substantial blow to the Indian mining sector, with potential financial repercussions amounting to Rs 1.5-2 lakh crore in arrears dating back to April 2005. The court allowed states to levy taxes on mineral rights and mineral-bearing land, and to claim refunds of royalties from April 1, 2005, onward.Experts said that decision is expected to severely impact not only the mining industry but the entire value chain, leading to significant inflationary pressures on end products.
Miners’ body FIMI said the Indian mining sector is already saddled with highest taxation in the world. The July 25 judgement of the Supreme Court has given unbridled powers to states for imposing various taxes and levies, B K Bhatia, Additional Secretary General FIMI, told PTI.
“Now this order of 14th August mandating collecting dues retrospectively with effect from 1st April, 2005 will give further jolt to the Indian mining industry as arrears may work out to the tune of more than Rs 1.5 to Rs 2 lakh crore and the mines in the states like Odisha and Jharkhand would be most affected,” Bhatia added.
(With PTI inputs)
