Steelmakers And Mining Firms Likely To Face Margin Risks As Retrospective Tax Looms: Fitch
But Fitch expects limited financial impact from the payment of past dues, as the court has provided a long timeframe of 12 years.
Indian steel and mining companies will be under pressure and are likely to face margin risk after the Supreme Court held the states' power to tax mineral rights retrospectively, according to Fitch Ratings.
The rating agency said operating costs are likely to rise significantly if states impose additional mining taxes. "We see increased risks from a sustained weakening of the companies' Ebitda margins due to the prospective levies," it said in a note on Monday.
But Fitch expects a limited financial impact from the payment of past dues, as the court has provided a long timeframe of 12 years.
The Supreme Court had held that its nine-judge bench verdict on the nature of mining royalty and the state's power to tax mineral rights will have retrospective effect. The court said that the states will not be allowed to tax transactions made prior to April 1, 2005. The court said that interest and penalties on demands for the period prior to July 25, 2024, shall be waived.
Tata Steel Ltd.'s low rating headroom exposes it to greater credit risks from the impact of prospective taxes compared with JSW Steel Ltd. Tata Steel's average Ebitda over FY21–FY24 would be lower by around 9%, and its Ebitda leverage would be higher by around 0.3 times. "We expect the impact of past dues to be lower for JSW Steel than Tata Steel."
The rating agency said steel and mining sector companies are more at risk from state-imposed taxes than sectors such as power and cement. "We believe additional state taxes on coal will lead to an increase in electricity prices as fuel cost changes are passed through to consumers."
A key unknown is whether individual states will raise demands for past dues or impose additional taxes, the note said.
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.
