Fitch Ratings has warned that mining companies in India may face a significant increase in operating costs if states choose to levy additional mining taxes, as permitted by a recent Supreme Court judgment. This ruling allows mineral-rich states to collect past dues on royalty and taxes on mines and mineral-bearing land from as far back as April 1, 2005. The payment of these dues is to be spread out over the course of 12 years, starting from April 1, 2026. Fitch believes that while the steel and mining sectors are more vulnerable to these state-imposed taxes, there will be limited financial impact due to the extended timeframe provided by the court for payment.
According to Fitch, metal and mining companies in India may struggle to pass on the potential increase in operating costs to consumers, as their products are typically linked to global prices. It is anticipated that any additional state taxes on coal will lead to an uptick in electricity prices, as changes in fuel costs are typically passed on to consumers in the power purchase agreements of many coal-based power plants in India. As a result, Fitch expects that higher electricity prices may accelerate investments and growth in renewable power generation in the country.
The full impact of the Supreme Court ruling on mining companies is expected to become clearer in the coming quarters. Fitch has highlighted a key uncertainty in terms of whether individual states will start demanding payment of past dues or impose additional taxes on mining companies. The rating agency has emphasized that the steel and mining sectors are most vulnerable to state-imposed taxes, in comparison to sectors like power and cement. Fitch has also expressed concerns about a potential weakening of companies’ EBITDA margins due to these prospective levies.
In response to the court ruling, Fitch Ratings has stated that the imposition of additional taxes by states on Indian mining companies could lead to a substantial rise in operating costs. This could result in a sustained weakening of the companies’ EBITDA margins. However, Fitch also believes that the financial impact from the payment of past dues will be limited, given the 12-year timeframe provided by the court for payment. The rating agency expects the steel and mining sectors to be most affected by state-imposed taxes, as compared to other sectors like power and cement.
Fitch has also suggested that any potential increase in operating costs for metal and mining companies may be difficult to pass on to consumers due to their products being linked to global prices. In particular, Fitch has noted that additional state taxes on coal could lead to higher electricity prices in India, as fuel cost changes are typically passed through to consumers under existing power purchase agreements. This, in turn, could accelerate investments and growth in renewable power generation in the country.
Moving forward, Fitch expects that the impact of the Supreme Court ruling on mining companies will gradually become clearer in the next few quarters. The rating agency has identified a key uncertainty regarding whether individual states will start enforcing payment of past dues or imposing additional taxes on mining companies. Fitch has highlighted the steel and mining sectors as particularly vulnerable to state-imposed taxes and has raised concerns about the potential impact on EBITDA margins of companies operating in these sectors.
