Green light for retro tax sends a shockwave across mining and metals companies

For cement, steel and mining companies on tenterhooks ever since states were allowed to tax mining last month, the dreaded news came on Wednesday.

The Supreme Court allowed states to tax them from as far back as 2005, in a lightning bolt for companies that could face tax demands of as much as ₹2 trillion, and prompt more states to raise tax demands, experts said.

The first to take the hit will be miners in states such as Odisha, Tamil Nadu, Karnataka, Rajasthan, Chhattisgarh and Uttar Pradesh which have already raised tax demands; however, as miners seek to recover the tax dues, the impact could reach sectors such as power, steel and cement, which provide the building blocks of the economy.

Some industry voices have urged New Delhi to pass legislation to amend the Mines and Minerals (Development and Regulation) Act (MMDR Act), 1957 and mitigate the impact of the apex court’s ruling. However, experts said that it may not be that simple.

Tata Steel Ltd said it is studying the Supreme Court judgement, and information on any financial impact will be disclosed in due course.

But one immediate conclusion that experts and industry insiders could draw was that there will be more litigation.

The Ruling

The Supreme Court on Wednesday said its 25 July judgement granting states the power to tax mineral rights and mineral-bearing land will apply retrospectively. The nine-member constitutional bench rejected the government’s plea for the judgement to be applicable prospectively to avoid a significant financial burden on mining companies.

The top court allowed states to recover past tax dues on mineral rights since 1 April, 2005, and directed states to waive interest and penalties levied on the dues before 25 July, 2024. The dues can be paid in a staggered manner over 12 years starting 1 April, 2026.

“Companies which have existing demands from states will now have no option but to pay the principal amount as per the judgement,” said Aakash Bajaj, partner at law firm Khaitan and Co. Bajaj had represented cement maker Lafarge India over its dispute with the Rajasthan government over past dues pertaining to its limestone mines in the state.

Bajaj warned that the judgement could also be interpreted by more states to raise demands. “The language of the judgement appears to be broad and can be interpreted to allow states which have not yet raised demands to also raise fresh retrospective demands starting April 2005,” he said.

The Federation of Indian Mineral Industries (FIMI), an industry lobby, said arrears could be in the range of ₹1.5-2 trillion.

“This is bound to have a crippling impact not only on the mining industry but on the entire value chain, leading to an unprecedented inflationary rise in all end products,” said B.K. Bhatia, FIMI’s additional secretary general. He urged the Union government to “urgently take necessary legislative measures to mitigate the situation.”

Solicitor General of India Tushar Mehta had earlier argued in the Supreme Court that if applied retrospectively, public sector companies alone could face demands to the tune of ₹70,000-80,000 crore. He said that one major PSU could face demands amounting to three times its net worth. He did not name the company.

Listed companies affected by the judgement have seen 2-3% stock price erosion already, said Niladri B, partner, Grant Thornton Bharat.

“Level 3 impact will be on downstream sectors, not all of whom can pass on costs. The overall hit on the economy may be more than what anyone bargained for,” he said.

The BSE Metal Index lost 1.51% on Wednesday, on a day the benchmark Sensex rose 0.19%. Top Sensex constituent losers were UltraTech Cement (-2.37%), JSW Steel (-1.93%) and Tata Steel (-1.81%). NMDC Ltd (-6.08%), Coal India (-3.18%), SAIL (-2.26%) and Vedanta (-0.63%) were also in the red.

What’s next?

Companies should engage in active dialogue with the state governments concerned to negotiate payment terms for the 12-year staggered period, ensuring that obligations are met without jeopardizing their financial strength and stability, said S.R. Patnaik, partner (head – taxation), Cyril Amarchand Mangaldas.

The affected miners may undertake a thorough review of their contracts with customers to ascertain whether such liability can be recovered from them, he said. “Lastly, mining companies may pursue legal recourse for ambiguities related to the payment terms, which could also be a prudent step.”

While FIMI has urged the Centre to find a legislative recourse, Bajaj said that it may not be that simple for the government to make the situation go away. This is due to one observation in the Supreme Court’s ruling that stated that the states’ right to tax land includes any minerals found underneath it.

Entry 50 of the State List mentions the right of the states to tax mineral rights subject to any limitations imposed by the parliament. Entry 49 stipulates the states’ right to tax land and buildings. But unlike entry 50, it is not subject to or limited by any law by the parliament, Bajaj said.

“The Supreme Court ruled that taxation on land includes any minerals found underneath it and states can use this to impose further levies,” he said.

The State List contains the subjects on which states have exclusive legislative power.

The Supreme Court has left it up to the states’ discretion to levy retrospective duties. Experts called for states to show prudence when raising demands.

“States should show wisdom and not gut the goose that lays golden eggs,” Niladri said.