Differing and unclear methods to assess duty across states hinder investment prospects
Coal offtake till October 20 at 287.19 mts is 4.9% lower compared with the same date last fiscal.
By Satnam Singh Amendments in mineral laws (both coal and non-coal) since early 2015 have paved the way for auctions as the method for allocation of mineral assets. A number of such assets in segments like coal, iron ore, limestone, bauxite, and gold, have been auctioned in the last over five years. Recently, the Union government opened up the coal sector to commercial mining, and around 38 coal blocks have been identified for auctions, as part of the ongoing first round of auctions. The idea is to bring down the coal imports of nearly 250 million tonnes per annum.
The Ministry of Mines too is contemplating a series of reforms to enhance mineral production and promote private investment. While the central government has been deregulating the mining sector, a commensurate effort is required at the state level for private investments to materialise. Under the current set-up, while coal blocks are allocated by the Centre and non-coal minerals by the states, the mining lease in all cases is executed by the states.
A key issue being faced by bidders while participating in auctions is the lack of clarity on the stamp duty payable—which differs from state to state—even in cases where the auction is conducted by a state. Prior to 2015, the leaseholder paid stamp duty on an estimate of the royalty or dead rent payable to a state. However, post auctions, the states started taking into account the auction premiums quoted by the successful bidder for the purpose of stamp duty.
This resulted in a substantial increase over the previous regime, potentially thwarting the viability of coal mines. This was evident from the delays in starting of coal mines auctioned in states like Chhattisgarh in early 2015. The issue was eventually resolved by not considering auction premiums for calculation of stamp duty. During iron ore auctions in Karnataka in 2016, the state amended its stamp duty act to avoid a similar type of stalemate.
Overall, varying methodologies for stamp duty calculation across states affect the viability of projects, competition and bid premiums for mineral blocks. It is indeed laudable that the Ministry of Mines, as part of its proposed reforms, is taking up rationalisation of stamp duty. Here are a few suggestions that could be considered:
Stamp acts of the states and related procedures should be clear and comprehensive to avoid any ambiguity and misinterpretation. Stamp duty should be calculated on the average grade of the mineral block, as per the Information Memorandum published by the state during the auction process. Stamp duty should take into account the mine life, as per the mining plan, and not be based on the term of mining lease. Instead of one-time upfront payment, stamp duty may be made payable in instalments, say, over a period of ten years or the mine life, whichever is lesser. In the event a staggered payment schedule is adopted for stamp duty, the rates should be frozen for the payable time-period to avoid any changes in payouts at a later stage.
Mineral auctions have brought in transparency in allocation of coal and non-coal minerals. However, among the measures needed to make the process more effective is the rationalisation of methodologies to calculate stamp duty across states. Further, clear understanding should be provided on how the duty would be calculated at the time of auctions so that the same can be factored in while undertaking the feasibility assessment.
The writer is Director, Energy & Natural Resources, CRISIL Infrastructure Advisory