After increasing export duty on iron ore from 10% to 15%, the government now seems to be seriously considering skimming away a part of domestic iron ore producers? abnormally high profits by imposing a windfall tax in the wake of a sharp rise in international iron ore prices in recent months.
A proposal to this effect is pending with the finance ministry. Even Union mines minister BK Handique who had opposed the export tax on the commodity has supported the idea of a windfall tax on the profits of iron ore producers.
The move comes at a time when China?s decision to increase the flexibility of its exchange rate is expected to make ore exports to that country, a ravenous consumer of the mineral, more lucrative.
International iron ore prices have risen sharply after big producers like Rio Tinto and BHP Billiton earlier this year shifted from annual contracts to quarterly contract for supplying iron ore to steel companies in countries like Japan and China.
The ministry of steel has made a strong pitch for imposing a prohibitive duty to discourage iron ore exports.
Speaking at a recent steel industry seminar, Virbhadra Singh, minister of steel, had said the government will have to look at the question of exports differently by bringing in definitive deterrence. This may be in the form of either a prohibitive duty or quantitative restrictions. But such measures can be brought in only in a phased manner with a clear long-term plan.
Going a step further, law minister Veerappa Moily has favoured a virtual ban on iron ore exports. At a group of ministers? meeting to consider National Mineral Policy 2008, there was general agreement that iron ore resources of the country should be conserved for the domestic steel industry.
Meanwhile, political support for additional measures to curb iron ore exports is gaining traction with Indian steel makers facing margin squeeze due to declining demand on the one hand and rising prices of key inputs like iron ore and coking coal on the other. Currently, export of iron lumps and pellets attracts 15% duty and fines 5%. Indian steel makers mostly use lumps.
Public sector steel manufacturers like SAIL and RINL are undertaking ambitious capacity expansion projects. SAIL and RINL are together spending about Rs 90,000 crore on capacity expansion projects. Iron ore requirement of these companies will rise commensurately when these capacities are commissioned.
Meanwhile, pressure is mounting for taxing iron ore producers? supernormal profits. India is not the only country to consider such a proposal. Australia, a key iron ore producer, is mulling imposing a 40% resource tax.
When crude oil prices surged between 2005 and 2008, countries like the US seriously toyed with the idea of imposing a windfall tax on the supernormal profits of oil companies.
In India, while making its submission before the Kirit Parikh committee last year, ONGC had offered to share a part of its profit as a windfall tax with the government if it was kept out of the subsidy-sharing regime.