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Indian Coal Mining Industry Faces Tax Hit

by Mary Swire,, Hong Kong

01 August 2011

The new provisions in the Indian draft Mines and Minerals (Development and Regulation) Act requiring non-coal mining companies to contribute 100% of their royalty to the proposed District Mineral Foundation, and coal mining companies to contribute 26% of their profit to the Foundation, has put the mining sector under pressure,according to the Federation of Indian Chambers of Commerce and Industry (FICCI).

At present, tax outgoings from companies’ profits are between 40-45%, which includes income tax and other state/central taxes. With the proposed profit sharing of 26% for coal and 100% royalty for other minerals, these outgoings will go beyond 60%, says FICCI.

The Federation believes that new provisions will make the domestic mining and mineral based industry globally uncompetitive, hampering growth and employment potential of the mining industry and discourage investments.

These apprehensions were expressed by Tuhin Mukherjee, Chairman of the FICCI Mining Committee and Managing Director of Essel Mining and Industries Ltd., P K Mukherjee, Co-Chairman of the Committee and Managing Director of Sesa Goa, and Anand Goel, Member of the Committee and Joint Managing Director of Jindal Steel and Power, at a FICCI press conference.

The FICCI Mining Committee stated that mining in India is already one of the most highly taxed sectors globally, with an estimated effective tax rate of around 43% (for iron ore), compared to 35-40% for most of the major mining countries like Brazil, South Africa, Australia and Canada. It said that in India, the effective tax rate would rise to over 60% in the case of coal and 55% for iron ore after these new provisions are implemented.

The issues concerning the mining sectors are:

  • A new Central Cess (tax on tax) at 2.5% is being levied in the draft Act. This will be collected in two ways: as an excise duty on indigenous consumption of ore; or as a customs duty in the case of the ore being exported. Also, there would be a State Cess at a rate not exceeding 10% of the royalty. FICCI believes that imposing both Central and State Cess will put a needless burden on the mining industry.
  • In the earlier law, the surface rent was capped at a level equal to the land revenue. In the draft Act, no such cap is provided, and FICCI says that such a provision, without a cap, may lead to State governments fixing surface rent at abnormal rates, thereby significantly increasing the cost of mining.
  • The implementation of the clause related to the sharing of 26% of a coal company’s profit with the District Mineral Foundation would be difficult because an integrated coal company could have mines in different districts/states and it would be difficult to calculate the profit of each mine separately.

In view of the above, FICCI has suggested the adoption of a uniform policy for coal and non-coal minerals, and for coal it says that there should be a royalty based payment and not one based on profits.

TAGS: tax | India | mining | royalties | law | tax rates

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