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New coal royalty formula to hit captive miners

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The government’s decision to switch to a new royalty formula for coal would erode the benefit currently available to by way of reduced royalty rates. At the same time, it would increase state governments’ royalty collection multi-fold.

As captive miners do not engage in any sale, these currently pay royalty to states as a percentage of the sale price realised at the nearest mine. This arrangement benefits captive miners, as Coal India (CIL) prices are 70-80 per cent lower than those of international benchmarks.

“As CIL prices determine the price at which royalty is charged from captive users, these companies have been securing coal at a lower price. This benefit would no more be available to captive miners. The shift to gross calorific value () has already increased the notified price. Also, the fixed component in the royalty formula has been done away with. So, the royalty outgo of captive miners is set to see a huge jump,” said a senior official privy to the development.

The move seems to part of a strategy to bring about a gradual shift to market prices and reap the benefit from opening up the coal sector to private companies once the is passed. “The entire strategy has been implemented very gradually and meticulously by the government,” the official said.

India produces about 530 million tonnes (mt) of coal a year. About 82 per cent of this comes from state-owned CIL. Captive coal miners, largely private sector companies that have been allotted blocks for their specified end-use, account for a mere 35 mt of the annual production. These companies currently pay about Rs 680 crore as annual royalty to states.

Till 2007, royalty for all minerals was charged at a fixed rate. In 2007, the government then switched to ad valorem royalty rates (rates linked to market values) for all minerals, based on the recommendations of a high-level expert committee under then Planning Commission member Anwarul Hoda.

Interestingly, the government had then made an exception for coal, for which a shift to an ad valorem rate regime was not found feasible, as its prices were not market-linked. So, a fixed component was inserted in the royalty formula for coal, based on the recommendations of a high-level panel under , chairman of the Prime Minister’s Economic Advisory Council.

The royalty on coal is currently charged by the government using a formula that has a fixed component (Rs 180 per tonne) and a variable ad valorem component (five per cent of the sale price at pit mouth). Together, these effectively lead to a rate of 13 per cent. This has now been increased to 14 per cent, comprising only the ad valorem component.

Sources said the timing of introducing the GCV system was part of a strategy and a well-thought move. “Coal being sold by CIL at Rs 1,500 per tonne fetched a price of Rs 4,000 a tonne in the international market. Now, with the GCV in place, this has pushed domestic prices further towards global rates and the royalty collection would double. At the same time, the move would facilitate the entry of private players into coal mining, as price control is gradually eliminated,” the official said.

CIL had done away with the system of pricing based on the useful heat value on January 1 this year to align the pricing of Indian coal with global standards. Later, the miner had to partially roll back the price rise, owing to protests by the power industry, which alleged prices had risen an average 12.5 per cent across grades. The GCV system of grading, however, remained.

The Coal Mines Nationalisation Amendment Bill 2000, which would allow private players to mine coal, has been pending in the upper House of Parliament since 2000.

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