Mining and steel companies are caught between a rock and a hard place. A lingering concern is that the Karnataka (Mineral Rights and Mineral Bearing Land) Tax Bill 2024—which proposes to impose tax on a retrospective basis from 2005 and rates up to 3x the existing royalty rate—could significantly erode their profitability.
The casualties are NMDC Ltd and Vedanta Ltd, the mining companies, and JSW Steel Ltd, which has a large steel-making facility in Vijayanagar, Karnataka. Since the bill was introduced in the assembly on 16 December, shares of Vedanta, NMDC and JSW Steel have declined by 11.6%, 8.4%, and 8%, respectively.
With the proposal of differential tax rates based on the method of leasing, Vedanta and NMDC would have to pay tax at 3x and 1.5x the royalty rate, respectively, whereas JSW Steel would have to pay only ₹1 per tonne. Additionally, all the companies would have to pay a flat rate of ₹100 per tonne. Apart from having its own mines, JSW Steel also procures a significant amount from NMDC and would face the maximum impact in case the increased cost is passed on.
At the current rate, NMDC iron ore prices may go up by over ₹1,100 per tonne (62% Fe, fines). Even if they pass it on, they would still need to shell out the past dues if the bill goes through. Liability on account of retrospective taxes for NMDC would be ₹9,157 crore and ₹5,355 crore for Vedanta, said a PhilipCapital (India) report dated 19 December. The amount is to be paid in 12 equal annual instalments starting FY26 and would be equal to 7% and 1% of FY27 Ebitda, the report estimates. Ebtida is short for earnings before interest, taxes, depreciation, and amortization.
Centre could be the saviour
Yet, considering the complexity of the issue, affected companies could seek intervention from the central government. “It may be noted that the central government had raised the royalty rate in 1992 in response to the Supreme Court judgment barring states from levying taxes. Likewise, we believe the central government is likely to lower the royalty rate now,” said Satyadeep Jain of Ambit Capital.
A reduction in royalty rate from 15% to 10% and a cap of 100% on mining tax outflow would be revenue neutral for Karnataka without denting profitability of companies, he added.
Meanwhile, sluggish global demand and cheap Chinese imports have kept domestic steel prices muted. No respite on steel prices is seen unless demand prospects improve. On the non-ferrous metals side as well, recent price trends for alumina, aluminum and copper have been unencouraging.
