Taxing time for India's metal, mining companies: Macquarie

Enactment of the new Mining Bill is likely to have a negative impact on existing pure-play mining companies, with their profits impacted by as much as 12%, global research firm Macquarie says.

On September 30, the Union Cabinet approved the Mines and Mineral Development and Regulation (MMDR) Bill, 2011, which has provisions for 26% profit-sharing by coal miners and an amount equivalent to royalty by others with project- affected people.

As per the provisions of the Bill, coal mining companies will have to share 26% of the profits from their mines with people impacted by projects.

In the case of non-coal miners, the new law will provide for payment of an amount equivalent to the royalty paid to the state government to project-affected persons.

According to a research report by Macquarie, the new Bill is expected to reduce the profits of pure-play mining companies like NDMC and Hindustan Zinc in the 2011-12 financial year by 9%, but the expected impact is much worse in the case of Coal India, which could see its profits eroded by as much as 12%.

Giving details, Macquarie said, "The government collected $1 billion in terms of royalty in fiscal year 2010 (from minerals other than coal) and a 26% tax on mining profits for Coal India could add another $650 million to this fund."

Apart from compensating project-affected people through profit-sharing and royalty, the new Bill also obligates mining firms to pay a 10% cess to state governments and 2.5% to the Centre on the total royalty paid.

Enactment of the new Mining Bill would result in the profits of captive mining (steel) companies such as Tata Steel being whittled down by 9%, while SAIL would see its profit decline by 7%, Jindal Steel would witness a 3% reduction and JSW Steel would take a 1% hit.

With regard to captive mining companies (base metals), the new Mining Bill could impact profits of Sterlite Industries by 6%, Nalco by 4% and Hindalco by 1%.

"A cess on royalty of 10% going to state and 2.5% to the central government will be levied. Including these proposals, the metal sector in India for some commodities will be at the highest end of taxation," Macquarie said.

The Bill is likely to be tabled in the Winter Session of Parliament.

Macquarie further said the Bill still has a lot of areas that need further clarity, such as how should coal mines allocated for captive use be taxed, will companies be given benefits for CSR expenses, etc.