Mineral Taxation

System
Outline
 Introduction
 Legal framework : mining taxation

 Types of Taxes

 Tax sharing between Centre and State

 Prospecting fees, Royalty ,

 Dead Rent, surface rent

 Current royalty regime in India

 Current reforms

 Conclusion
INTRODUCTION

 Mineral tax systems vary widely in the world.

In each country, there exists a gamut of
levies, each with a plethora of components
impinging on the mineral sector at various
stages of prospecting, exploration, trade and
final consumption.
 The high risk, high capital-intensity
characteristics of the mining activity coupled
with long gestation lags involved in
prospecting and extraction call for special
tax treatment of the sector
 CURRENT ISSUE: STATES FEEL THAT THEY ARE
NOT BEING ADEQUATELY COMPENSATED


 Rising mineral prices do not get reflected in their

receipts
 States not in a position to remedy the situation

 Most mineral rich states are among the poorest


  EMERGING ISSUE I


Ø Shortfall in mining investment is hurting

infrastructure; Greater private investment
required
Ø Geology and tax regime are important factors
in investment decisions.
Ø High tax burdens will make mineral products
globally uncompetitive

  EMERGING ISSUE II:


Ø Growing public concern with environmental

degradation due to mineral extraction.
Ø Use of environmental resources can be with or
without spillover effects.
Ø Mineral taxation impacts rates of extraction
and depletion dates

Principal Issues Affecting Taxation Systems
CHARACTERISTICS OF A GOOD MINERAL TAX SYSTEM :
INVESTOR ’ S VIEW

Tax system should:

• maximize the net present value of the company’s

revenue

• be based on realized profitability

• permit early pay-back of capital

•
• be stable and predictable
•
• transparent
• 7
•
• avoid tax types that do not reward increased
efficiency
•
• encourage investment in exploration
•
• encourage investment in marginal mines
•
• maximize the net present value of tax revenue
•
• capture more revenues during periods of high
profits
•
•be effective with low-cost administration
•
•
Principal Issues Affecting Taxation
Systems
- Primary Goal of mining taxation policy -

•society’s objectives: achieve development and

obtain income at an acceptable social cost

•company’s objective: achieve adequate return on

investment

It is in the interest of both parties to

obtain successful projects
9
Principal Issues Affecting Taxation Systems
The Government ’ s taxation dilemma :
fiscal diversity or uniformity?
   
• same tax treatment for all sectors? (fishing, light
industry, mining)
• each sector can claim some uniqueness
• special treatment can cause distortions
between sectors
•

• Government dilemma:
Uniform tax system applicable to all
sectors
or
system that accounts for uniqueness in 10

each sector
Principal Issues Affecting Taxation Systems
Should the tax system adjust for price cycles?

When prices are high :

Surpluses are available to be taxed
Special taxes: additional profit tax, graduated royalty

When prices are low :

Without relief from non-profit based taxes, mines may
close

Most mineral fiscal system today partially self-

adjust because they are based mainly on
profitability 11

(income tax, withholding tax on remittances)

Principal Issues Affecting Taxation Systems

- Unique nature of mining: tax policy response -

Tre nd is to  harmo nize  fisc al syste ms ac ro ss 

e c o no mic  se c to rs, but mo st natio ns still pro vide  

so me  spe c ial tre atme nt to  the  mining se c to r

12
Principal Issues Affecting Taxation Systems

- Unique nature of mining: tax policy response -

Mine will initially import equipment from specialized suppliers.
Response: low or no import duty and VAT relief

Mineral product must compete for share of global market.
Response: relief from VAT and export duties

13
 Community related costs – 
deductible/credits?

clinic / school / water supply / housing / nutrition 14
 TYPES OF TAXES
EXCISE TAX
 Excise tax or Cenvat is based on the
manufacture of goods within India and is
governed by Central Excise Tax Act 1994.
The rate of excise duty are as determined
under the Central Excise Tariff Act
1985(CETA)
 Minerals are classified under chapter 26 of
CETA. Minerals are generally exempted from
excise duty vide specific notification.
However Cess is levied on mineral Ore under
various legislations.
 Currently there is an exemption from cess on
production of iron ore and manganese ore
but production of crome ore still attracts
cess of Rs6/- per metric tonne.
 CUSTOM DUTY
 Custom duty is levied on the import of goods
in India. At present the effective custom
duty rate is 24.2%.
 Minerals import generally attract lower duties
on 2 counts First, minerals are not subject to
excise duty when produced locally, as a
result the additional custom duty in lieu of
excise duty is zero
 Secondly the basic custom duty on minerals
such Iron Ore , manganese and bauxite is
lower than the general rate.
 Overall the effective custom duty rate on iron
ore is 6.14% whereas it is 14.17% for
limestone and dolomite
 VAT
 VALUE ADDED TAX: Presently in most states
minerals are liable to VAT at rate of 4%
however precious metals like gold and silver
are taxed at reduced rate of 1%
 Mining like any other sector attracts corporate
taxes under the Income Tax Act 1961.


 For example: Corporate Income Tax- any

company corporated in India or having its
management and control in India is liable to
pay taxes. The effective corporate tax rate is
33.99% of domestic companies and 42.23%
of foreign companies.

 TAX-SHARING BETWEEN CENTRE
AND STATE
 10th Finance Commissions - June 1992

 Completion - 19 year of Tax-Revenue sharing
between Centre and the State in India

 Case study in Fiscal federation but leads to
certain reflection in this area of tax
dissolution from the Centre to the State

 Earlier, the central income tax and the central
excise duty were shared by the Centre and
the states.

FORMULA ON CENTRE AND STATE TAX
SHARING


 Finance commission suggests the formula for

sharing of taxes between the Centre and
states


 The report of the commission is significant as

it comes just before the government is
considering major direct and indirect tax
reform
 commission will have to take into consideration
the impact of these changes while deciding the
devolution to the states from the taxes collected
by the centre. These include income tax and
various indirect taxes such as excise, customs
and service tax.

 The commission’s suggestions, which will cover a
five-year period starting from April 1 2010, are
not binding, but they are generally implemented
by the government. The Commission was asked
to submit its report by October 31 2009.

 Three months extension. In a representation to the
commission, state governments had asked for an
increase in their share in the divisible pool of the
central taxes to 50% from the current 30.5%.

 They had also demanded that all central
surcharges and cess should be included
in the divisible pool.


 At present, money collected through cess

that are imposed for specific purpose
and are not shared with the states.

 PROSPECTING FEES AND ROYALTY
 Under the MMRD Act, Prospecting Fee
 The holder of a Prospecting License is required
to pay annually, in advance, a prospecting
fee in respect of the ensuring year or part of
the year at such rates and time as may be
fixed by the State Government, being not
less than 50 paise and not more than 5
rupees per hectare of land.He or she is also
liable to pay royalties at the rates specified
in Schedule II to the MMRD Act, in the case
of minerals to be removed for commercial
purposes and on quantities removed in
excess of those specified in Schedule III of
the Mineral Concession Rules of 1960.

 ROYALTY


 The holder of a Mining Lease is liable to pay

royalties in respect of any mineral removed
or consumed by him or her from the leased
areas at the rate specified in the MMRD Act.
 The Central Government is empowered to
increase or reduce the rate of royalty, but it
cannot increase the rate in respect of any
minerals more than once during any three-
year period. The royalty is to be paid at such
a time and in such a manner as the State
Government may prescribe.
 


 ADVANTAGE OF ROYALTY
 Royalties have the advantage over other tax
instruments in yielding an early minimum
and relatively assured flow of revenue to
governments and it is more straight forward
and simpler than tax administration.
 Sometimes, royalties are major or the other
source of revenue to government from a
producing mine, particularly, during the
early years of its productive life, and when
the company has accumulated high capacity
allowances for income tax purposes, or
during times when mineral production is
comparatively low.
 DISADVANTAGE OF ROYALTY
 The drawback of imposing royalties is that
they are generally insensitive to mine
profitability and are regressive in nature in
the sense that marginally economic projects
may be affected by them more heavily, than
more profitable mines.


 This regressive feature of royalties arose from

the fact that royalty may tend to form a high
proportion of net cash flow for a marginally
economic mine than a more profitable one.
 DEAD RENT


 The holder of a Mining Lease must pay to the State

Government annual dead rent at such a rate as
may be specified in the MMRD Act, for all areas
included in the Mining Lease.

 Dead rent is the rent fixed for mines without
considering the fact whether the mine is
profitable or not. It is mostly fixed in a mineral
lease. This rent must be paid whether or not
minerals are being extracted from the mines.
Even though mining comes under the category
of one of the most hazardous occupation and
expectation of profit is limited, mining leases fix
dead rents on mining sites.

 Dead rent is a deterrent against the tendency
of leaseholders in cornering the mining lease
and keeping the mineral resources idle.


 Ideally, the ‘dead rent’ should have some

relationship with economic values of mineral
resources which are kept idle by the lessees
and not merely with surface area of the idle
leases.
 generally, one year is required for mine
development, and the same may be
exempted from levy of dead rent.
 SURFACE RENT

 The lessee is required to pay for the surface

area used for mining operations, at a rate
not exceeding the land revenue, as may be
specified by the State Government in the
Mining Lease
Current Royalty Regime in India
 Major minerals: GoI fixes, but are collected
and retained by states
 Tax system is uniform across states

 Changes in rates allowed once in 3 years

(stability)
 Regime moving progressively towards ad
valorem



Contd..
 Still, 22 out of 51 attract specific rates, incl
important ones like coal; grade-wise rates
for 6 (removes distortion)
 Ad valorem incidence of specific rates vary
from 1-2 % for iron ore to 25-35 % in case of
limestone
 Balance 39 items, rates vary from 1 % (mg
concentrate to 20 % (gypsum)
 Base & precious metals: fixed % of metal
content value based on LME price
 Minor minerals: States have powers to fix
and collect

Advantages of Quantity - based

•Easy to administer


Problem
•Is not price neutral

•Tilts time path

•Raises cut-off grade


Advantages of value- based

•Revenue buoyancy
•Price neutrality

Problem
•No benchmark in case of some

•Encourages under-reporting

•Transfer pricing (captive)


Advantages of profit based
Less distortionary
•More equitable

Problem
•Uncertainty in yield

•Problems in administration


Recommendations of Hoda Committee

 Mode: Move decisively to ad valorem rates

 Base: Transaction value; should include profit
element over unit cost of production
 Sale price rather than pit mouth value

 Sale price to be adjusted for transaction costs

etc
 Beware of transfer pricing by captive mines

 Illegal mining: Non-bailable, cognizable

criminal offence; special courts

Problems with proposed system
 Overestimates economic rent
 - Ignores capital costs in resource
exploitation
 - Desirable investment may be
discouraged, especially at high tax rates
 Double taxation of capital income when
royalty coexists with corp. tax
 - Corp taxes are levies on capital income
 - Non-deductibility of capital costs means
royalty is based on (economic rents plus
capital income)
 Government has no clue on how much it can
tax without dissuading investment

 Way forward: Production Sharing
Contract (as in petroleum)--Efficiency
through Competitive Bidding
 Prior to 1999
 Majority of block allocation on nomination basis to
ONGC and OIL.
 No competition, no incentive => Sluggish
investment; poor exploration
 Post 1999

 Allocation on competitive bidding basis with

transparent bid evaluation criterion
 Private participation allowed; 100 percent FDI

 Govt gives license without making any financial

commitment for itself

 Basis for bid evaluation: (I) financial standing
and technical capability, (II) work
commitment and (III) fiscal package
meaning what % of profit petroleum to be
shared with Govt.
 Model production sharing contract provides
fiscal stability to the investors
 Quality of exploration has improved

 162 blocks allocated; already invested $ 3

billion; commitment: $ 8 billion

 CONCLUSION
 Mineral sector activities attract several taxes
in highly diversified forms.


 The conclusion is that if a government were to

tax away the full pure rent, this would
undermine the long-term viability of a
country’s mineral sector.


 The policy conclusion of the theoretical

literature on minerals taxation is that ‘ fair
sharing’ of revenue between
government and companies ought to
focus on sharing the pure rent ‘



 If a country is interested in the long term viability

of its mineral sector, it should leave a sufficient
share of the pure rent to companies in order to
retain their interest in the continued development
of the country’s mineral sector.


 Fiscal costs of projects to be developed in India as

well as in selected foreign countries to help in the
assessment of the economic viability of
investments for exploration, mining and design
for taxation cum policy packages in India.





 The Government should therefore boost taxation

while also lifting price controls and liberalizing the
capital market.


 State ownership of natural resources such as

minerals create unique challenges in maintaining
fiscal responsibility.


 Well-designed institutions may present part of the

solution, but multiple examples illustrate that
without political will to maintain and enforce
them, even the best institutions cannot prevent
interference.
 

 Thank You…