How the minerals tax could inflate your electricity bills: MC explains

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The recent Supreme Court (SC) ruling allowing state governments to retrospectively impose taxes on mining activities dating back to April 1, 2005, is expected to have far-reaching implications, according to analysts. One area where these changes might be felt is in electricity bills.

In the August 14 ruling, the SC allowed states to recover past tax dues without any interest, which are to be paid over the next 12 years starting from the next financial year. This directly impacts companies having large mining operations across mineral-rich states like Jharkhand, Odisha, and Chhattisgarh.

Here’s how this new minerals tax could potentially impact your electricity costs.

What is a minerals tax? 

It is a fee that is imposed by local, state, or federal governments on either the amount of minerals produced at a mine, or the revenue or profit generated by the minerals sold by a mine. A royalty can be imposed as either a “net” or “gross” royalty.

What did the SC say in its ruling?

A nine-judge constitution bench ruling of the SC says that states can collect previous dues on royalty and tax on mineral-bearing land dating from April 1, 2005. The SC  said the dues can be paid in instalments by mining companies and the Centre to mineral-rich states, spread over 12 years, starting April 1, 2026. However, interest and penalty on the past dues have been nullified in the ruling.

What is the connection between the minerals tax and electricity bills?  

India depends heavily on coal for power generation, with 48 percent, or 217 giga watts, of power generated using this resource. The material is mined in states like Chattisgarh, Jharkhand, Madhya Pradesh, West Bengal, and Odisha, and used as fuel in thermal power plants to produce electricity. The sector is largely dominated by public sector companies like Coal India Ltd (CIL), which is one of the largest and primary suppliers of the raw material for power plants. With the current ruling, analysts predict Coal India to take the biggest hit due to its extensive and long-standing mining operations in these states.

To date, only Jharkhand and Odisha have issued such demands. Earlier this month, the Jharkhand Assembly passed a bill to impose a cess on mined minerals to boost the state’s revenue. The bill proposes varying tax rates for different minerals on a per-metric-tonne basis: ₹100 for coal and iron ore, ₹70 for bauxite, and ₹50 for manganese ore and other minerals.

Mahanadi Coalfields Limited, a subsidiary of Coal India operating in Odisha, is particularly vulnerable, as it accounts for nearly 27 percent of Coal India's coal production. The public sector entity also has a significant presence in Jharkhand, where it operates through three subsidiaries: Eastern Coalfields Limited, Bharat Coking Coal Limited, and Central Coalfields Limited, exposing it to potentially higher payouts. Analysts expect that other states could also come up with such a law, as it would significantly boost their revenues.

Meanwhile, minerals like iron ore, copper, and aluminium, which are derived from mining, are essential in building and maintaining electrical infrastructure, such as transmission lines, transformers, and generators.

How could these changes affect the cost of electricity for consumers?

When a government imposes or increases taxes on minerals, mining companies incur higher costs for extraction and production. This is because they must now pay more to extract the same amount of coal or other minerals. As a result, these additional costs are often passed down the supply chain. For coal, this means that power plants will have to pay more for their fuel. There are growing concerns about whether Coal India, the country’s largest coal producer, will pass these increased costs on to the power sector, which is the primary consumer of its output.

The ruling's  impact on electricity prices will also depend on India's regulatory framework. Since electricity prices in India are typically regulated by state power regulators, the extent to which power distribution companies can pass on increased costs to consumers will vary in different states. However, the ruling might have an immediate effect on the cost of short-term or merchant power, which operates outside the regulated framework. The impact on long-term, regulated power contracts could be more gradual, depending on how state regulators decide to adjust tariffs.

"Coal India has contracts with with various buyers and there is a possibility of (cost) transfer. However, one needs to wait and watch for the official press release from the company," said Parthiv Jhonsa, Lead Analyst (Metal and Mining), Anand Rathi Institutional Equities. Meanwhile, CIL said it will assess the  financial impact of the ruling, which will be disclosed in due course of time.