The impact of the Supreme Court's ruling that the states have the power to levy additional taxes on minerals should be minimal and companies will not see any change in their business economics. according to Nuvama Research.
On Wednesday, the Supreme Court held that a landmark judgement of its nine-judge bench on the nature of mining royalty and the state's power to tax mineral rights will be given retrospective effect, subject to some conditions.
The court said that the states would not be allowed to tax transactions made prior to April 1, 2005. The time for payment of tax can be staggered over 12 years, commencing on April 1, 2026. The interest and penalty on demands for periods prior to July 25, 2024, shall be waived.
The ruling stood as a major headwind for metal and mining companies, as the companies would have additional liabilities, that would have to be paid as tax to state governments.
Impact On Profitability
In a note dated Aug. 16, Nuvama pointed out that the Jharkhand government recently proposed additional cess of Rs 100 per tonne on coal and iron ore and Rs 70 per tonne on bauxite. Assuming that all state governments follow a similar tax rate, the research firm said the earnings before interest, taxes, depreciation and amortisation of companies could also be negatively impacted by 2–3%, which is not alarming.
The ruling will affect firms operating mines in Odisha, Karnataka, Jharkhand and Goa. Due to the 12-year payment period that includes no interest or penalties, the impact on the mining companies' cash outflow will be contained, according to the brokerage.
Also Read: NMDC, Hindustan Zinc, Other Mining Stocks Hit After Supreme Court's Retrospective Royalty Verdict
Least Impact: Coal India, NMDC
The impact on Coal India Ltd. and NMDC Ltd. will be minimal as the companies claim that they can pass on most of their past liabilities—in this case, additional taxes—due to their pass-through clauses on any regulatory cess, according to Nuvama.
NMDC has secured a commitment from its customers to pass on any cess costs. Likewise, a pass-through for coal supplied by Coal India under the fuel supply agreements is expected. These two companies are likely to experience minimal impact. However, it remains to be seen how effectively they will collect the dues from their respective customers.
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