Based on the value of minerals extracted, royalties are separate from taxes but are a significant part of mining companies' expenses. The relationship between royalties and new taxes will be a critical factor in India’s mining sector going forward. Representational image
States set to walk thin line between raising revenues and overburdening mining industry
Following SC ruling allowing them to tax mining firms retrospectively, states must ensure their tax rates align with the broader principles of federalism
States with mineral resources will likely tread carefully on fixing tax rates after the Supreme Court's ruling on August 14, 2024, empowering states to retroactively levy taxes on mining companies from April 1, 2005.
Last month, a Supreme Court bench led by Chief Justice of India DY Chandrachud upheld the power of states to tax mining lands and quarries independently of the Mines and Minerals (Development and Regulation) Act of 1957.
Now, states now face the challenge of setting new tax rates while considering existing mineral royalty structures.
Not a burden
Based on the value of minerals extracted, royalties are separate from taxes but are a significant part of mining companies' expenses. States must balance the need to generate revenue with the risk of overburdening the mining industry, making the relationship between royalties and new taxes a critical factor in the future of India’s mining sector.
According to reports, public and private sector mining companies may have to pay ₹1.5 lakh-crore in arrears following the apex court order.
The Court ruled that tax payments can be made in staggered installments over 12 years starting April 1, 2026. Additionally, it ordered that any interest and penalties imposed on or before July 25, 2024 will be waived.
States would have to generate revenue with the constitutional mandate to ensure that tax policies do not burden mining companies. This delicate balance will influence the final tax structures that states implement.
Constitutional mandate
The legal foundation for states to impose taxes on mineral rights is anchored in the Constitution of India, particularly under Article 246 and the State List (Entries 49 and 50).
These provisions grant states the authority to design and implement tax regimes specific to their jurisdictions. However, the retroactive application of these taxes, dating back to 2005, introduces complexities that require careful navigation within the existing legal frameworks, according to the Federation of Indian Mineral Industries.
States must ensure that their tax rates do not exceed the constitutional limits and align with the broader principles of federalism.
Interplay between royalties and new taxes
One critical factor influencing state-imposed tax rates is the existing royalty structures on minerals.
Royalties, typically calculated based on the value of minerals extracted, are distinct from taxes but play a crucial role in mining companies' overall financial obligations. The Supreme Court's clarification that royalties are not taxes may lead states to view additional taxation as a necessary supplement to these royalties.
States with higher royalty rates might opt for moderate tax rates to avoid overburdening the mining sector, while those with lower royalties could impose higher taxes to maximise revenue. The interplay between royalties and new taxes will be crucial in determining the overall financial impact on mining operations.
Vital source of income
Economic conditions within states will significantly determine tax rates. States with abundant mineral resources but lower levels of economic development, such as Chhattisgarh and Jharkhand, may impose higher taxes to boost revenue for public welfare programmes.
These states might see the mining sector as a vital source of income that can be leveraged for broader economic development.
Conversely, economically advanced states with diversified revenue streams may opt for lower tax rates to attract and retain investment in the mining sector.
This variation in economic conditions across states could lead to a patchwork of tax rates, with some states emerging as more attractive for mining investments than others.
Comparative analysis
International benchmarks will likely shape state tax policies. Countries with competitive tax regimes in the mining sector, such as Canada and Australia, have successfully attracted significant foreign investment.
In contrast, India’s current effective tax rate of up to 64 per cent for existing mines is among the highest globally, which could deter investment.
States might consider these global practices when setting their tax rates to balance competitiveness and revenue generation. However, if the overall tax burden remains high, India could continue to rank poorly on the Investment Attractiveness Index for mining, making it challenging to attract foreign investors.
Stakeholder consultation
Engagement with stakeholders, including mining companies, industry bodies, and local communities, will be crucial in determining the final tax rates. States that actively consult with these groups will likely develop more balanced and sustainable tax regimes.
For example, mining companies might advocate for lower taxes to maintain profitability. In comparison, local communities may push for higher taxes to ensure that the benefits of mineral extraction are shared more equitably.
The outcome of these consultations will influence the degree to which tax rates align with all stakeholders' interests. States that effectively manage these discussions will be better positioned to implement tax policies that are both fair and effective.
Fiscal stability agreements
The presence of fiscal stability agreements, which provide long-term tax certainty to investors, could also impact state decisions on tax rates. These agreements are typically designed to protect investors from sudden changes in tax policy, ensuring a stable business environment.
States may negotiate such agreements to attract investment while securing a fair share of revenue from mineral extraction. For instance, states might offer lower tax rates or other incentives as part of these agreements, particularly for new mining projects or significant expansions.
This approach could mitigate some potential negative impacts of high taxes on investment in the mining sector.
Tax administration
The ability of state governments to administer and enforce tax collections will play a critical role in shaping tax policies.
States with robust administrative frameworks may implement more complex tax systems with variable rates based on mineral type or extraction methods. In contrast, states with limited administrative capacity might opt for more straightforward, flat-rate structures to ease compliance and enforcement.
The effectiveness of tax administration will directly impact the revenue collected and the burden on mining companies. States that can efficiently manage tax collections without imposing excessive compliance costs will likely create a more favourable environment for the mining sector.
Political and social factors
Political considerations will inevitably influence tax decisions. States with significant public opposition to mining activities, mainly due to environmental concerns, may impose higher taxes to address these issues.
Conversely, states that encourage mining as a driver of economic growth may adopt more moderate tax policies.
Social factors, such as the need to generate public support or address local grievances, will also play a role. States might adjust tax rates to reflect public sentiment, balancing the need for revenue with the social license to operate granted by local communities.
Implications
The retrospective application of taxes and the anticipated high tax rates will have far-reaching implications for the mining sector in India. The financial burden on mining companies will increase significantly, impacting cash flows and profitability.
Smaller players, in particular, may need help to meet these financial obligations, leading to potential consolidation in the industry.
The high tax burden could also deter future investments in the mining sector, particularly from foreign companies. India’s already low ranking on the Investment Attractiveness Index for mining could worsen as investors seek more favourable jurisdictions.
Furthermore, the increased costs for mining companies will likely be passed on to downstream industries such as steel, cement, and power. This could lead to higher prices for these products, with a cascading effect on the broader economy and consumers.
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