Retrospective taxes set to cost mining industry Rs 1.5 trillion in arrears

Nifty Metal index dropped by 2.4%, and key players like NMDC, Hindustan Copper, and JSW Steel saw their shares fall between 2% and 6% following the SC judgment on Wednesday

India’s mining sector is facing a massive financial burden following a Supreme Court decision allowing states to collect royalty and tax on mineral-bearing land retrospectively from April 1, 2005. According to a report by The Times of India, this ruling could result in arrears amounting to Rs 1.5 trillion, dealing a significant blow to both public- and private-sector mining companies.

‘Royalty not tax’: SC ruling on mining

On July 25, the Supreme Court affirmed states' authority to impose cess on mining lands and quarries, while clarifying that the royalty paid to the central government by mining operators did not constitute a tax. The ruling on Wednesday, delivered by a nine-judge Constitution Bench led by Chief Justice of India D Y Chandrachud, extends this decision to be applied retrospectively, despite the central government’s plea for a prospective approach.

This judgment, while securing state governments' right to tax within their legislative domain according to fiscal federalism principles, has sparked concern over its potential to discourage investment in the mining sector. The mining industry, already facing challenging market conditions, could see further strain as companies struggle to absorb these unexpected costs.

Mining dues to be paid over 12 years

The Supreme Court has provided some relief by allowing the payment of these dues to be staggered over a 12-year period, starting from April 1, 2026. This measure, though mitigating immediate financial pressures, does not eliminate the long-term impact on the sector.
 

How much will this cost mining firms?

The financial implications of this decision are substantial, with public-sector companies alone facing arrears of Rs 70,000-80,000 crore. State-owned steelmaker SAIL is estimated to owe Rs 3,000 crore, while industry estimates suggest the total outstanding could rise to Rs 2 trillion. Private-sector giants like Tata Steel and Vedanta are also bracing for a significant impact, with Tata Steel listing a contingent liability of Rs 17,347 crore.

A senior official from the Ministry of Mines told Reuters that the judgment could deter future investments in the sector. Industry experts are divided, with some highlighting the importance of state revenues for welfare schemes, while others warn of the severe financial impact on mining companies, which may not be able to recover these costs from consumers due to the deregulated nature of the sector.

Legal experts like S R Patnaik, partner and Head of Taxation at Cyril Amarchand Mangaldas, noted that the ruling at least prevents the liabilities from becoming disobedient, giving companies a chance to assess and manage their financial obligations. However, the broader implications for the industry remain significant, particularly as mining companies will have to pay these dues out of their own reserves, potentially undermining their financial stability and future expansion plans.
 

The ruling could also have a ripple effect on power tariffs, as generation companies may seek to pass on the increased costs from coal miners to consumers under the "change in law" provisions of power-purchase agreements. This could lead to a series of legal battles as utilities challenge these cost recoveries.

Nifty Metal Index drops 2.4 per cent

The market has already reacted negatively to the news, with the Nifty Metal index dropping by 2.4 per cent, and key players like NMDC, Hindustan Copper, and JSW Steel seeing their shares fall between 2 per cent and 6 per cent. The judgment’s impact on the sector’s investment prospects and future policies will likely be closely monitored by both industry leaders and government officials as they evaluate the path forward.

Markets are closed on Thursday for India's 78th Independence Day.