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Committee on 'royalty on royalty' and NMI suggests future auction shift to real revenue share model

A high-level committee tasked with looking into issues of mineral royalty and suggesting a formula for a National Mineral Index is ready with its first set of recommendat...

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26 Nov 2021, 10:30 IST
Committee on 'royalty on royalty' and NMI suggests future auction shift to real revenue share model

A high-level committee tasked with looking into issues of mineral royalty and suggesting a formula for a National Mineral Index is ready with its first set of recommendations.

The draft report tackles the issue of double royalty - that is royalty determined by an average sale price (ASP) arrived at by sales that include the cost of royalty - and other shortcoming of the ASP published by IBM, which determines the royalty and taxes miners pay towards District Mineral Fund and National Mineral Exploration Trust. A National Mineral Index, its third mandate, is not covered by this draft first report.

The NMI is awaited with great anticipation. Miners who have bid high premiums in auction hope this would bring down some of their tax burdens, but mineral-dependent states worry it would affect their royalty collections that have in Odisha's case surged from the high premiums committed in two rounds of auctions.

The committee conscious of this has recommended auctioned mines be continued to be taxed on existing methodology, people with knowledge told SteelMint. It however acknowledged that the issues with how the ASP is arrived at has led to "uncertainty and doubts about the accuracy of the data being submitted by the lessees." Sale value is determined from the returns for each dispatch, filed by the lessees with the Indian Bureau of Mines. Stepping beyond its terms of reference, the committee has recommended the auction process - currently based on the highest premiums (based on ASP) - shift to an actual revenue sharing formula. "Revenue can be easily gleaned from the audited accounts of the company, scrutinized by independent auditors and income tax authorities, which have a higher sanctity than the self-declared sales figures," says the draft report according to those in the know.

Led by a retired government of India secretary, the committee met nine times. Here are some of the other recommendations it may make if the draft report remains unchanged:

On the issue of double calculation of royalty:

A big issue for the industry was paying royalty, DMF and NMET dues on an ASP calculated on the basis of ex mine price, which is a weighted average of 'sale value', which includes royalty, DMF and NMET. The committee sees how this is circular reference can be problematic and may suggest royalty, DMF and NMET be deducted from sale value to arrive at a Pit Mouth Value (PMV) which can be used to arrive at an ASP.

This change is likely to result in loss of revenue for mineral-rich states in the immediate future. It suggests the Centre compensate states for the shortfall in royalty, DMF and NMET collections for a period of five years after the new methodology is introduced.

Lessees who have already bagged mines through auctions will not benefit from this. Recognising that the methodology for arriving at an ASP was a critical part of bid conditions and that changing it would be "unethical and liable for examination from vigilance angle," it is proposed that IBM publish two sets of ASPs - one, under the existing model, for auctioned mines and another, based on pit mouth value, for mines to be auctioned in the future.

On the shortcoming of fixing ASP for iron ore:

Separate ASPs are also recommended for domestic and exports since the two are distinct markets. It also wants the top 10 and bottom 10 percentile of sales excluded.

It is suggested GST be used to arrive at a more realistic ASP. Until the Finance Ministry figures out how GST data can be shared with IBM, its suggested that the format of the monthly sales returns be modified to capture GST information too.

Underreporting can be checked with a comparison of the company's Annual Reports and fined at the rate of 10% of the corrected royalty. A late fee - equivalent to 1% of the royalty for each day's delay in filing and an amount of 50% of royalty if returns have not been filed before the month end - is also prescribed.

Issues and shortcoming in fixation of ASP for limestone:

The limestone mine in Nongtrai, East Khasi Hills District in Meghalaya is to be treated as a captive mine and its sale value excluded while calculating the ASP. This will reduce by half the data of sales from non-captive mines but since they account for only 6% of all limestone production, the committee doesn't see this making a significant difference.

Issues and shortcoming in ASP for bauxite:

Since 2000 royalty on bauxite has been linked to the price of the metal on London Metal Exchange and charged on the content of aluminium metal in ore produced: 0.06% for metallurgical grade (for alumina) and 25% of ASP on ad valorem basis for non-metallurgical grade.

The ASP of metallurgical bauxite is arrived at thus: 52.9/100 x percentage of Al2O3 in bauxite on dry basis x average aluminium price in Indian rupees for the month as published by IBM. The conversion factor as notified by the central Government is 6.4 %.

The committee observed that the cost of transport and logistics in carrying ore from mine to the plant is not being taken into account and the ASP works out to the input cost at the plant and not ex mine price of bauxite. Industry players had been asked for information of their transport costs but did not provide this. The Ministry of Mines may be asked to figure out a weighted average of such logistical costs to arrive at the actual cost of bauxite at the pit head. The conversion factor may accordingly be recalculated based on this pit head price. Again, this change will not apply to deposits that have been auctioned.) Non-metallurgical grade bauxite can follow the iron ore model.

Written by Meera Mohanty

 

26 Nov 2021, 10:30 IST

 

 

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