SC ruling on royalty negative for mining companies, but impact on profitability likely to be limited: Report

In an August 14 ruling, the SC allowed states to recover past tax dues on mining activities without any interest, which are to be paid over the next 12 years starting from the next financial year.

The Supreme Court (SC), earlier this week, allowed state governments to collect mining companies' tax dues pending from April 1, 2005.. While the Supreme Court ruling has been against expectations and sentiment negative, the financial implications and cash flow impact are not expected to be severe for most companies, said Motilal Oswal Financial Services (MOFSL) in a recent report.

What does the SC ruling say?

The ruling by 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 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.

Also Read | Mining body seeks legislative fix as SC ruling may create Rs 2-lakh-cr royalty backlog

Liabilities for Coal India, other players

Tata Steel has provided for Rs 17,400 crore as contingent liability (Rs 14 per share). The payment would be spread over 12 years, which would mean no one-time pressure on the financials even if it were to pay this entire sum over the 12-year period, according to analysts. Similarly, SAIL has provided a contingent liability of around Rs 3,000 crore in this regard.

Companies such as Coal India expect demands of Rs 35,000 crore due to this levy. However, as 80-85 percent of its supplies are FSA-linked, it would be able to pass through the same to customers and would be liable to pay about Rs 6,000 crore (Rs 10 per share). Further, this amount of Rs 6,000 crore would be paid over a 12-year period, the brokerage highlighted.

Aluminium producers are currently assessing the implications of the Supreme Court order, though they do not anticipate any significant impact on their financials. Vedanta, in particular, has not faced any substantial demands related to this matter in the past and plans to explore legal options if and when any demands arise.

Also Read | Mining companies to pay tax to states from 2005 in a staggered manner, rules SC

No material impact on companies

While this judgment is negative for the metals and mining sector, the court has also provided relief by allowing staggered payment over 12 years starting April 26.

In addition, any interest and penalties levied on or before July 25 shall be waived, the brokerage noted, adding that its interactions with companies suggest that this could be a long-drawn process, and they are waiting for clarity on what course of action different states take.

"While we await more clarity from the companies on the implications, the interactions with some players suggest no material impact even if they were to pay the entire demand raised," said MOFSL, adding that the companies are exploring further legal options in this regard, and relevant associations would appeal for a suitable course of action.

The SC judgement settles a point of law, not individual cases and does not directly crystalize the liability of mining companies, noted Kotak Securities. The demand raised by states under different laws could be further litigated based on merits on a case-to-case basis, it added.

Non-integrated companies like JSP and JSTL are better positioned compared to integrated producers such as TATA and SAIL, according to analysts at Kotak. They anticipate only a minor negative impact (0-2% of market cap) on their covered companies due to the ruling. However, additional taxes imposed by states like Jharkhand could raise the cost of production by 1%-2%.

For Coal India, pricing under Fuel Supply Agreements (FSA) is at the mine-head, so any additional costs, including levies and taxes, are passed on to buyers. Thus, potential new or retrospective levies are unlikely to significantly impact the company’s earnings, Kotak said.

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

On the contrary, some believe that the ruling may have significant financial implications and put a strain on the sector. "It may potentially lead to arrears between Rs 1.5 lakh crore and Rs 2 lakh crore. The verdict, which upholds the power of states to levy taxes on mineral rights and mineral-bearing land, will further strain the sector," reported PTI, citing industry players as saying.

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