The recent Supreme Court ruling, allowing state governments to retrospectively impose taxes on mining activities dating back to April 1, 2005, has fanned concerns over potential hikes in metal prices and consumer costs, with analysts warning that the decision could contribute to rising inflation, potentially delaying any anticipated rate cuts.
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 next financial year. This directly impacts companies having large-scale mining operations across mineral-rich states like Jharkhand, Odisha, and Chhattisgarh, which means public sector entities like Coal India, Steel Authority of India (SAIL), National Mineral Development Corp (NMDC) and Tata Steel could face higher payouts due to their extensive and long-standing mining operations. So far, only Tata Steel has been vocal about its outstanding dues to Odisha government, which is Rs 17,000 crore, roughly 9.3 percent of the steelmaker's market cap. A top mining body has predicted the payouts to be as much as Rs 2 lakh crore.
"The specifics of these taxes, once clarified, will undoubtedly lead to increased mining costs and, consequently, higher metal costs—potentially triggering broader inflationary trends. Despite some mitigations, such as the staggering of payments over 12 years and exemptions on penalties, the judgment arrives at a challenging time," said Rakesh Surana, Partner, Deloitte India. Another analyst Vikram Kasat from Prabhudas Lilladher also flagged similar concerns.
"This ruling could also impact cement companies and may contribute to rising inflation, which in turn could delay potential rate cuts," Kasat said.
Major Players Under Pressure
Tata Steel, Coal India, Steel Authority of India Limited (SAIL), and NMDC are among the companies facing the prospect of substantial financial payouts. To date, only Jharkhand and Odisha have issued such demands, significantly affecting Tata Steel and SAIL due to their extensive operations in these states for iron ore and coal. Mahanadi Coalfields Limited, a subsidiary of Coal India operating in Odisha, is particularly vulnerable, as it accounts for nearly 27% of Coal India's total coal production, increasing its exposure to potential higher payouts.
Meanwhile, non-ferrous players such as Hindustan Zinc and Hindalco flagged no material impact on the tax. The former which primarily operates out of Rajasthan for mining, said, "There is no material impact owing to the retrospective effect of this judgment on the company." But analysts predict that other mineral-rich states like Karnataka, Madhya Pradesh and Rajasthan could gradually come out with such a law. Metal major Hindalco flagged no impact, Managing Director Satish Pai said the company has only 10-12 percent exposure on a prospective basis.
Earlier in the month, Jharkhand Assembly passed a Bill to impose 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: Rs 100 for coal and iron ore, Rs 70 for bauxite, and Rs 50 for manganese ore and other minerals.
Mining conglomerate Vedanta, which has bauxite mining operations in Odisha, said it is evaluating the judgment." We can confirm that have no material demands raised upon any of our businesses at this time. If and when any such demands are raised, Vedanta will consider all regulatory and legal remedial measures on a case-to-case basis," a company spokesperson said.
Axis Securities senior research analyst Aditya Welekar noted that private players are expected to be slightly more impacted by the decision, as state governments may choose to be more lenient towards PSUs such as NALCO, Coal India, and NMDC. "An amendment to the MMDR Act to limit the ability of states to impose taxes is not a possibility that can be discounted," Welekar said.
Meanwhile, SAIL said in its investor call that it is already paying state taxes in Chhattisgarh and Madhya Pradesh. With the Jharkhand tax announcement, the impact may be around Rs 200 crore.
Implications for Metal Prices
The immediate consequence of these retroactive taxes is likely to be an increase in production costs for mining companies, which could ripple through the entire value chain. "The ruling could hike costs for non-ferrous companies by around 2-4% but we believe these would be transferable and won't majorly impact the companies. Ferrous companies, which have acquired mines post Covid or are import-dependent, would be the least impacted," said Parthiv Jhonsa, Lead Analyst (Metal and Mining), Anand Rathi Institutional Equities.
The situation is more complex for ferrous companies. With the increased competition from Chinese steelmakers, companies may struggle to absorb the additional financial burden. “ Globally, the steel industry is struggling, with a sluggish recovery in the Chinese economy leading to significant imports into India and putting downward pressure on the market. This external pressure, coupled with the new financial burdens imposed by this judgment, does not bode well for the sector in the short term. Additionally, the increased financial strain might hamper the industry's ability to invest in new capacities or expand existing ones, impacting future capacity expansion plans due to potential cash flow issues," Surana said.
Impact on the Power Sector
Coal India, the country’s largest coal producer, could be among the hardest hit by this ruling. With vast mining operations across several states, the company faces significant retroactive tax liabilities. There are concerns about whether these costs can be passed on to the power sector, which is the primary consumer of Coal India's output.
"Coal India volume is contracted, there is a possibility of transfer. However, one needs to wait and watch for the official press release from the company," Jhonsa said.
Meanwhile, CIL said it will assess the probable financial impact thereof, which will be disclosed in due course of time.
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