SC ruling on royalties to affect profitability of mining companies: Moody's

Moody's Ratings has said the Supreme Court ruling on royalties and taxes will be credit negative for mining companies like Tata Steel, UltraTech Cement, and Vedanta Resources Ltd, as it will dent their cash flows and affect their profitability.

In a major victory for mineral-rich states, the Supreme Court had on August 14 allowed them to seek dues from April 1, 2005 on royalty and tax on mineral rights and mineral-bearing land from the Centre in a staggered period of 12 years.

"The retrospective taxes are credit negative for companies with mining operations in India such as Tata Steel Ltd (Baa3 stable), UltraTech Cement Ltd (Baa3 stable), JSW Steel Ltd (Ba1 stable) and Vedanta Resources Ltd (Caa3 negative) because the instalment payments will dent their cash flows," Moody's Ratings said in a statement.

"These companies will have to pay state taxes going forward that will hurt their profitability," it said.

"While the companies' retrospective taxes could be significant, the effect on their cash flows will be eased because owed taxes will be paid in installments over 12 years beginning 1 April 2026," Moody's Ratings said.

Companies' ability to pass on higher costs to customers could also mitigate the effect on their profitability, as per the statement.

However, the new taxes as well as denting cash flows, could prompt them to recalibrate their capital spending plans, it said.

During the hearing on July 31, the Centre and mining companies have opposed the demand of states for refund of royalty collected since 1989.

The July 25 verdict had overruled a 1989 judgement and subsequent decisions of the apex court, which held that only the Centre has power to impose royalty on minerals and mineral-bearing land.

Some opposition-ruled mineral rich states then sought refund of royalty levied by the Centre and taxes from the mining companies since the 1989 verdict.

The matter of refund was heard on July 31 and order was reserved.