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BW Businessworld

Falling Off The Trajectory

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The mining industry is currently in news for the illegal mining and various related matters. The Supreme Court of India as well as other courts have taken the various initiatives and have issued direction to carve the illegal mining.

Mining and metal iIndustries projects have been delayed due to environmental and land acquisition related issues. Much of what ails the sectors, therefore, lies outside the ambit of the budget's tax proposal which also include introduction of the Mines and Mineral Development and Regulation (MMDR) Bill, 2011.

India's mining industry has been on a strong growth trajectory during the last decade. However, recently high taxes, a lot of policy uncertainty etc. have had a serious impact on the industry. The mining industry is, therefore, at a cross roads, and has urged the government to take number of steps to provide a positive environment for growth.

The export duty on iron ores was reduced from 15 per cent to 5 per cent in the year 2008 and the export of iron ore fines were exempted from export duty to encourage export of goods from India. However, in the year 2009, above exemptions were withdrawn and accordingly, iron ore fines were made subject to export duty.

The Budget 2011-12 seriously impacted the mining industry with the Central Government increasing export duty on export of iron ore to 20 per cent on both lumps and fines, from 15 per cent and 5 per cent respectively.

The harried iron ore industry is further shocked by 50 per cent increase in the export duty from 20 per cent to 30 per cent. However, the export of iron ore pellets has been fully exempted from export duty to encourage the value addition process for fines. This could be a result of the steel industry's demand for a ban on iron ore exports, in a move to keep the raw material in the country, since there is a huge increase in capacity in the pipeline. The export duty was levied to shift the export of iron ores to the steel industry, so that the steel industry can get enough raw materials for their operations. This move to discourage the export of ore will help the domestic steel industry, which has been finding it difficult to get the ore it required, due to the mining ban in Karnataka`s Bellary district.

Iron ore pricing is related to the international market and India is a price-taker. In that sense, India really may not be able to decide the price at which it would prefer to export iron ores. The increase in export duty will therefore impact the profitability of miners exporting iron ores from India.

The unpredictable behavior of the government is a big challenge for the Industry as in one year, the government reduces export duty, and in next year, increases the same and in subsequent years, brings the export duty on peaks. This impact the long term contracts executed by the miners and impact the profitability of the minors

However, low grade iron ores are not used by the Indian steel industry; miners are therefore seeking the abolition of the export duty on iron ores, as this will only discourage export without any benefits for the Indian Steel Industry.

In addition to this,  in the last Budget 2011-12, the Central Government with intent to introduce Goods and Service Tax (GST) levied excise duty on various goods which were previously exempt from excise duty but subject to VAT and accordingly, the Central Government has arrived on a list of around 330 such items. Around 100 items from this list were made subject to excise duty in the Budget 2011-12. Similarly, in the Budget 2012-2013, the Central Government might decide to levy excise duty on minerals which are currently exempt from excise duty but subject to VAT, although the Industry believes that, considering the current fiscal situation, the status quo should be maintained.

In the taxation sphere itself, a key expectation of the industry is the introduction of a deduction for expenditure on mine closure. Under the current regulations, a miner can surrender the leased area only after restoring it, through reclamation, surface back filling, removing dumps, plantation over waste rock dumps, etc. These activities involve substantial expenditure, known as ‘Final mine closure expenditure'. The industry wants a deduction for such expenditure, in line with similar deduction allowed to the petroleum industry under section 33ABA of the Income Tax Act.

Steel Industry:

The industry's key demand is the grant of infrastructure status. Steel firms have asked the Finance Ministry to grant this status, which would ensure long term funds and tax holidays for the steel industry. This has in fact been a long pending demand, but although the Government considers steel production to be a core sector activity, it has not granted the benefits that a formal infra tag attracts.

Another key demand of the industry is an increase in import duty on the benchmark product - HR coils. Surging imports, mainly from China, have been the industry's greatest difficulty in 2011 and higher import duty is a way to solve the problem.

In view of the shortage of coal in India and rising input costs, the Industry has demanded that the import of coal should be exempt from customs duty. Considering the situation of domestic coal availability, the Central Government is also considering this request of the steel producers.

Summary
In conclusion, miners are seeking a reduction of the export duty on iron ore fines and a clear way forward on the taxation of export of iron ores while the steel industry hopes to get infrastructure status and an increase in import duty on HR coils.

(Author is Partner & National Head - Indirect Tax, KPMG )