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Informist, Monday, Aug 19, 2024

 

MUMBAI – The Supreme Court's recent judgement, which upheld the right of states to levy taxes on mineral rights and mineral-bearing land, could lead to a rise in operating costs for steel and mining companies, Fitch Ratings said in a note today. The development puts margins of these companies at risk if states impose additional mining taxes, as allowed by the Supreme Court, the agency said.

 

The apex court on Jul 25 upheld state governments' power to levy tax on mineral rights and mineral-bearing lands in a majority 8-1 judgement. The top court held that royalty payable on minerals was not like a tax under the Mines and Minerals (Development and Regulation) Act, 1957. Further, on Aug 14, the court held that its verdict would apply retrospectively. The top court said state governments can levy and renew the demand for taxes, but they shall not operate on transactions made prior to Apr 1, 2005.

According to Fitch, Tata Steel Ltd, which has a "BBB-" rating, is at a greater credit risk from the impact of the prospective taxes compared to JSW Steel Ltd, which has a "BB" rating. "Tata Steel's average EBITDA over FY21-FY24 would be lower by around 9%, and its EBITDA leverage higher by around 0.3x, if it were to treat the respective year's tax imposed by Odisha state as operating cost, instead of additional contingent liability," it said. Tata Steel had 173 bln rupees of accumulated contingent liabilities to the state of Odisha as of June-end. EBITDA refers to earnings before interest, taxes, depreciation, and amortisation.

 

Any additional taxes by states post the apex court ruling are likely to have a higher impact on the steel and mining sectors as compared with power and cement companies. "Metal and mining companies have limited ability to pass on the potential increase in operating costs, as their products track global prices," Fitch said.

 

While any additional tax is seen as a risk, Fitch expects a limited impact of past dues as these will be paid over 12 years with no interest or penalties. Having said that, the financial impact is expected to be higher for Tata Steel, considering its larger scale of mining operations compared to JSW Steel.

 

The impact of the Supreme Court ruling will be clear in the coming quarters as there is uncertainty around whether individual states will raise demand for past dues or impose additional taxes. "The governments will have to balance the benefits of additional tax inflows with the risk of deterring further mining investments in their state," the agency said.  End

 

Reported by Ayush Kumar

Edited by Aditya Sakorkar

 

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