The nine-judge Supreme Court bench’s verdict on the application of its July 25 judgment that empowered the state government to collect tax on royalty collected on minerals settled a long-pending litigation. It also opened another avenue of revenue for the state government, whose ability to raise resources in comparison to the Central government is severely limited. In addition to this new tax revenue, mines-rich states would get additional funds of Rs 70,000 crores in the 12-year window.
On the flip-side, mining companies — both in public sector and private sector — will have to make a provision for an additional expenditure of approximately Rs 7,000 crores towards the tax on royalty and yearly instalment towards its arrears.
While this judgment is a positive for state governments, it will adversely affect the profit and loss accounts of companies operating in sectors like coal, iron ore, copper, bauxite, limestone among others. They will have to pass on the cost — incurred on account of the current tax and arrears — to their customers, who will transfer them to the end users, making it inflationary.
An increase in coal cost will affect the electricity cost, which will further increase the burden on the already loss-making power generation companies. It will also hit cement manufacturers, which will drive up construction costs across the board and upset growth-inflation balance in the economy.
While the judgment rightly restores the powers of the state under the federal power sharing as envisaged in the Constitution, its real impact would be seen on the mining companies as they would have to bear additional expenses due to the lack of past regulatory clarity.
All Indian institutions such as governments and courts should keep in mind that regulatory stability is the important feature that a global investor looks for before investing in any country. The Central government should, therefore, soften the blow for mining companies through long-term financing or other concessions.
