Already reeling from a contraction in demand from China thanks to its economic slowdown, iron ore exports have an unhappy New Year ahead as the finance ministry has decided to change the methodology of levying ad valorem export duty on iron ore from January 1. Currently, an ad valorem export duty of 15% is levied on iron ore lumps and 8% on fines.
A recent circular from the Central Board of Excise & Customs (CBEC) states that for the purpose of calculating export duty, the transaction value? the price actually paid or payable for goods for delivery at the time and place of export?would henceforth be the free on board (FoB) price of such goods.
The finance ministry says this move is expected to plug a loophole in the earlier methodology that allowed exporters to pay lower tax by inflating the chartering & freight (CFR) cost, which was bundled with the FoB price when calculating the export duty.
However, since freight rates have recently fallen by as much as 70-80%, the inflated figures caught the attention of the authorities. Therefore, it has been decided that exporters would have to provide a precise break-up of FoB and CFR price.
The development comes at a time when iron ore prices have already crashed in China, which accounts for a bulk of Indian iron ore exports. The current FoB price in China is around $55-56 per dry metric tonne (or, dmt, the weight of iron ore with 7% moisture content), down from a high of $147 a dmt in July. Last fiscal, the country exported 100 million tonne (mt) of iron ore, of which around 88 mt went to China.
The finance ministry?s decision has been criticised by the Federation of Indian Mineral Industries (Fimi), the apex association of mineral producers. According to the industry, not only would the new methodology result in an additional tax burden of at least Rs 180 crore on already beleaguered iron exporters, but it would also force them to revisit their existing contracts.
Fimi has written to the ministry to amend the circular so that the dmt quantity is taken into account while calculating export duty. Without this provision in place, ?It would be unrealistic to pay the export duty over and above the export FoB price realisation,? Fimi said.
Analysts agree that the new calculation would help prevent revenue leakage; it would also hike the price of the metal and make exports more difficult. ?The revised method of duty calculation will reduce the net realisation of Indian exporters. In today?s market, passing on the extra incidence to overseas buyers may prove difficult,? says R Muralidharan, ED, PwC.
According to a finance ministry official the circular is purely a clarification as there was uncertainty the field formations over the method of assessing the value and duty on iron ore. “While the cost will go up partially, we have given exporters a few months? time before bringing in the new system so that they can revisit their contracts,” he said.
Domestic steel producers, who feel that iron ore producers? margins were too high, have also welcomed the move. “The extraction cost of iron ore is around Rs 670 a tonne, whereas the selling price in the domestic market is around Rs 3,600 per tonne. Where else is such margins available,” asked an official of a steel company on condition of anonymity.
Steel producers and stand-alone iron ore producers have long been involved in a tug of war over iron ore exports, a key raw material for steelmaking.
While the steel producers maintain that domestic needs of the ore should be met first, ore producers maintain there is sufficient availability in the market and that steelmakers also export iron ore.
While steel producers have lobbied for a higher ad valorem export duty on iron ore, producers say there is no rationale for a hike given a market situation where prices are tumbling.
