Mining reform: What the government got right…

…and what still remains to be done, especially on taxation and royalties, as also incentivising exploration

Mining reform: What the government got right…
There are some state-specific taxes Goa and Karnataka, wherein, 10% of sale proceeds have to be contributed for similar activities as specified for the DMF. This double taxation further increases the burden on the industry.

By Aruna Sharma

Mining fell by 17% this fiscal. The sector can be enhanced to 7% of the economy, as is the case with many mineral-rich countries, from the current 1.7%. The recent Cabinet decision recommending the amendment of the MMDR Act 2015 and the Rules related to this should bring a course correction, with ease of surveys, FDI, environment and forest clearances, getting possession of land, the rationalisation of royalties and double taxation, logistics improvement, etc. While the Cabinet decision reflects intent, many concerns remain unaddressed.

According to a 2014 McKinsey Global Institute report, India needs to create an additional 115 million non-farm jobs by 2022 to reduce poverty. Mining has the potential to provide 12% of these non-farm jobs. India currently produces 95 minerals (four fuel, three atomic, 10 metallic and 23 non-metallic and 55 minor minerals). So far, 5.71 lakh square km has been identified by the Geological Survey of India (GSI) as area of Obvious Geological Potential; only 10% of this is being mined. India has significant reserves of coal, bauxite, titanium, chromite, natural gas, diamonds, petroleum, and limestone that are yet to be made productive.

The reforms that the Cabinet approval talks about are the amendment of 10A (2)(b) & 10A (2)(c) of the MMDR Act, with the aim to make a large number of mines available for auctions. This will bring a large number of mines into production, while making PSUs efficient and competitive. The original two provisions have been a bone of contention for industry and have affected decision-making in the issue of mining in Goa. A related issue is of imposing charges on extension of mining leases for government companies to create a level playing field. This may help resolve the long-pending Goa mining issue, via a small extra charge on the extension of leases, as is the demand of the Goa government.

An equally important consideration is that any new tax or raising of existing ones will only make the final product more expensive, and will add to the cost of infrastructure development. The decision to end the distinction between captive and merchant mines aims to provide more mineral in the market by allowing captive-mine-owners to sell up to 50% of the minerals excavated; this is welcome, but then the end-user is securitising the raw material and would be less interested in profiting from sale of mineral. Thus, the presumption of such a move adding to mineral availability needs to be tested against ground reality over a period of time.

Another major concern is low production by miners to manipulate demand pressure by restricting supply. Thus, the amendment recommending incentivisation of production and dispatch of mineral earlier than the scheduled date will enable continuous flow of minerals.

The district mineral fund (DMF) remains grossly under-utilised due to restrictive guidelines. The mineral districts also get nearly Rs 1,200 crore per annum for development (minus salaries) from the Finance Commission, rural development schemes, road construction, irrigation, agriculture and other social protection schemes. The need is to allow expenditure from this fund for road construction, health, education, etc.

One long-awaited correction on transfer of mineral concessions proposes that there will no charges on transfer of mineral concessions for non-auctioned captive mines. However, the amendment proposed falls short another much-needed change: giving the first right of refusal on mining or selling the rights to the explore. Therefore, in order to boost exploration, the National Mineral Exploration Trust must be made an autonomous body; this was also recommended by the parliamentary Standing Committee.

Out of the total Obvious Geological Potential (OGP) area of 0.571 million sq. km, only 10% has been explored so far, and mining happens in just 1.5% of the OGP area. It is crucial to get a detailed exploration profile for India. Exploration needs to be treated as a scientific process driven by corporations, and the Geological Survey of India must develop baseline data and make it available to attract exploration investment. The government should announce incentives to attract private sector investment in exploration.

The need to meet conditions set by the Minerals (Evidence of Mineral Contents) Rules 2015 for notifying unexplored blocks should be removed and investors should be allowed to invest in exploration with policy giving weightage to either the investment commitment for technology-intensive extraction of deep-lying minerals or faster production of bulk minerals.

The system of state governments choosing blocks that may not be optimal from the bidders’ perspective results in undue delays. The need is to shift to a single stage licensing system for exploration and mining of non-notified minerals.

Another major step in the Cabinet-approved amendment is rationalisation of stamp duty. In order to bring uniformity across the states, necessary amendments in the Indian Stamp Act, 1899, will be brought, but the need is rationalise all royalty. The present amendment stops short of this. Effective tax rate (ETR) on mining in India is 64%, while the global average is 34-38 %.

At present, in addition to MMDR Act requirement of royalty, payment towards DMF and National Mineral Exploration Trust (NMET), a mine-operator is also required to pay other fees and levies for use of forest-land under the Forest Conservation Act1980 and the Indian Forest Act 1927, including forest tax levied on forest produce procured from forest areas and compensatory afforestation charges.

The cost of doing business is creeping up primarily due to issues pertaining to royalty. As the royalty study group has acknowledged, corrective action is required on royalty on royalty. Due to exemptions from stacking and analysis, most mechanised mines are compelled to pay royalty at the rate charged for the highest grade of the ore, irrespective of the actual grade.

The Centre, along with the governments of iron-rich states like Jharkhand, Odisha and Chhattisgarh, must develop a mechanism for accepting mechanised/joint sampling during wagon loading and reconciliation of royalty payments at actual grade. While the Odisha High Court and the Supreme Court are hearing matters on this, statutory enactments and intervention before the judiciary by the Centre is essential.

In India, the combined cascading effect of taxes on mining is close to 64%. This is very high as compared to other mineral-rich countries. This makes India less competitive internationally. For instance, Indian iron-ore miners are one of the highest royalty payers in the world as compared to other major iron-ore producing countries. Iron ore in India attracts royalty of 15%, while that in Australia attracts 5.35-7.5%, in Brazil 2% and in China 0.5-4%. In the current statutory framework, royalty is included in average selling price of minerals and then it is computed on an ad valorem basis, leading to double taxation. It has been proposed to constitute a committee to examine this.

There are some state-specific taxes Goa and Karnataka, wherein, 10% of sale proceeds have to be contributed for similar activities as specified for the DMF. This double taxation further increases the burden on the industry.

Practising development economist & former secretary, GoI

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