BigMint Interview: How might the Karnataka minerals tax bill impact domestic industry?

The Karnataka Mineral Rights & Mineral Bearing Land Tax Bill 2024 has created a furor in the domestic minerals industry, with the prospect of a lethal impact on minerals taxes and prices, and the consequent impact on industry. During the course of an exclusive conversation with Md. Abdul Saleem (Advocate & Non-Executive Director, SMIORE) and Anand Varma (AOR & Counsel, Supreme Court and Delhi High Court), BigMint seeks to understand the far-reaching legal implications of the Bill and how might it impact the domestic industry.

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Excerpts from the interview:

What are the salient features of the Karnataka minerals tax bill which has been introduced recently?

The Karnataka Mineral Rights & Mineral Bearing Land Tax Bill 2024 has been passed in the state Legislative Assembly and presented in the Legislative Council following which it will be presented before the Governor for his assent. How soon might we see any impact? Well, that largely depends on the pace at which the state government decides to move on this.

The Bill basically envisages two types of taxes - on mineral-bearing land (fixed amount) and mineral rights tax (on the basis of royalty payments by leaseholders).

Are other states likely to come up with such taxes?

To put it briefly, the Supreme Court has recognized the power of state governments to levy taxes on mineral-bearing lands and mineral rights. Notably, the Parliament by amending MMDR Act can restrict or prohibit any taxes on mineral rights.

In our considered opinion, there is no authorisation from the SC for any state to levy a new retrospective tax for 20 years. The state governments have started putting forward claims such as the Jharkhand government; however, that is solely with regard to the SC ruling on mineral-bearing lands.

However, there seems to be a mismatch between the spirit and letter of law. While the MMDR Act specifies that for the major minerals the Union government will legislate, the letter seems to be overriding that principle.

What has been the industry's reaction to the Bill?

It is still very early to say but there is no reason for any knee-jerk reaction. The state government has moved the Bill; it is still not a law. The industry will have to wait to understand the impact. While the Centre can enact laws to amend the MMDR Act with respect to cutting or reducing taxes, the right of states to levy retrospective taxes is unfettered. However, there does not seem to be a level playing field between auctioned and non-auctioned mines.

How do you see the prospective tax affecting mineral supplies?

Miners will get 12 years to pay the retrospective taxes in installments. So, the impact on production and supplies won't be great and there is no need to press the panic button.

Will iron ore exports from Karnataka drop after witnessing an increase last fiscal?

Of course, there will be an impact. Moreover, the levy of retrospective tax may make it viable from domestic buyers to switch to imports. Domestic ore prices getting costlier means that the incentive for imports arises, especially when it takes time for the financial implications to emerge clearly.

How will miners manage to pass on the extra cost?

Not the end-users but the extra costs will ultimately be passed on to the common man in the form of prices of commodities. Apart from income tax, all other indirect taxes are passed on to the end-user. If any financial impacts are seen, imports of iron ore into Karnataka are expected to increase.