The new levy on mined mineral by the Karnataka government is all set to push up steel prices and squeeze margins at a time when large scale cheap imports are threatening survival of the industry.
Steel companies’ inability to pass on the costs to customers will dent their profitability.
Two-part levy
The State government has proposed to levy taxes on minerals in two parts. A mineral-bearing tax of ₹100 a tonne on all miners will be levied with retrospective effect from April 1, 2005.
The second part of the tax will vary among different category of miners and will be effective from January 2015.
For auctioned mines, the State levy will be only ₹1 per tonne of iron ore mined (JSW Steel falls in this category). For non-auctioned mines (Vedanta and slew of private miners fall in this category), the new tax will be three times the royalty rate which works out to 45 per cent of price fixed by IBM (Indian Bureau of Mines).
For PSUs whose lease was renewed before and after January 12, 2015 (NMDC) and completed 50 years of operations, the new tax will be 22.5 per cent each.
The levy on fifth category of PSUs whose lease was renewed before January 12, 2015 for 50 years, the fresh state government tax will be 45 per cent.
Revenue target
The Karnataka government has set a target to generate ₹4,200 crore of additional revenue through mineral rights tax, along with an estimated ₹506 crore from taxes on mineral-bearing land.
The new Bill follows a landmark ruling by a nine-member constitutional bench of the Supreme Court in July, which clarified that States have the authority to tax minerals and mineral-bearing land in their territory. The Court also permitted States to recover past tax dues on mined minerals from April 2005 in instalment over 12 years.
It will be difficult for the steel industry to pass on the additional cost to end consumers amid rising cheap imports and this will increase production cost and erode margins for steel companies, said a steel company executive.
Some of private miners may reduce or cease operations in Karnataka altogether, he added. JSW Steel, Vedanta and NMDC are the large iron ore miners in Karnataka.
Ashish Kejriwal, Director Research, Nuvama Institutional Equities, said Vedanta will be severely affected as it has to pay tax of 45 per cent and ₹100 a tonne on iron ore mined.
NMDC will also have a tough time, passing on the entire increase in levy while JSW Steel will be indirectly affected via higher price from NMDC and other miners besides additional levy of ₹100 a tonne for its captive mines, he added.