Informist, Friday, Aug 16, 2024
--Source: Coal India mulls passing on older royalty cost to consumers
--Source: Coal India to hold meetings with power cos over old royalty
--CONTEXT: Coal India contingent liability for royalty 36 bln rupees
By Avishek Rakshit
KOLKATA – Coal India Ltd is considering passing the retrospective royalty on coal, fully or partly, to its consumers from the power, cement, and steel sectors as the world's largest miner is suddenly faced with a financial liability that can run into billions of rupees. This follows the Supreme Court's order that state governments can claim royalty on minerals including coal with retrospective effect from April 2005 and that they will also have the power to determine the royalty rates.
"We are currently assessing the financial impact which is likely to run into thousands of crores (of rupees) and it will take some time as we need to factor in the various grades of coal which were mined and supplied during the past 20 years, the grade slippage which occurred, and many other things," a Coal India official told Informist. "But the retrospective royalty has to be borne by the customers as this is sudden and after all, it is the customers who used coal."
The official said that Coal India billed its customers based on the royalty provisions of the Mines and Minerals (Development and Regulation) Act, 1957, under which the Centre determines the royalty rates. Royalty charges, coal cess, and other taxes are reflected in Coal India's gross sales, which are billed to the customer, and the company reports net sales separately after discounting the royalty charges and taxes.
The Coal India official said that final coal prices, including the royalty and associated taxes, were borne by the consumer. If the company now has to pay the royalty, then the retrospective final coal price will also need to be adjusted and borne by the consumer. Notified prices and final coal prices are different as the former does not include taxes, cess, and other charges. The final coal price is inclusive of all costs.
"We need to discuss the matter with industry stakeholders, and also with our customers," the official said. The case being so, the brunt of retrospective royalty is likely to fall on the country's largest power producer, NTPC Ltd, which is Coal India's largest consumer and accounts for an estimated 80% of its total sales.
The matter becomes more crucial as the country's apex court has now given the states the right to decide on the royalty rate. Under the previous framework, the Centre had mandated a 14% royalty, plus additional levies, including which total royalty on coal came to around 18.5% on the notified price of coal. However, several states have been asking for a 20?sic royalty and additional charges. Now, with the Supreme Court's ruling, states have the power to increase the rate.
"If rates do increase, then it will have to be passed onto our consumers as well," the Coal India official said.
During 2023-24 (Apr-Mar), Coal India paid a royalty of 161 bln rupees, the company official said. Its two largest subsidiaries – South Eastern Coalfields Ltd and Mahanadi Coalfields Ltd paid the highest royalty exceeding 64 bln rupees. The primary recipients were Odisha, Jharkhand, and Madhya Pradesh among the 12 states which get royalty income from Coal India.
From April 2011 till March 2024, Coal India has paid a royalty of 1.3 trln rupees, the Coal India official said. As on Mar 31, 2024 the Maharatna company carries a contingent liability of over 36 bln rupees for the royalty.
An official with a power generating company said that if it so happens that power companies have to fully or partially bear the retrospective royalty or royalty increases, then it will have to pass it on to the distribution companies, who in turn have the option to pass it onto the final users of electricity such as factories, individual households, and others.
"As such, there is a high probability that it will lead to inflationary pressures," the power sector official said.
However, both the power sector official and the Coal India official said that since the power and coal sector in the country are largely dominated by public sector undertakings which are controlled by the government, the power and coal ministry will have to jointly work out a mechanism over the retrospective royalty and also for any increase in royalty rates.
Mineral-rich states have been asking for an increase in the royalty on coal for long as it will help generate more revenue while states that do not have large mineral reserves have been pressing to keep the royalty rate low. Recently, Jharkhand passed the Jharkhand Mineral Bearing Land Cess Bill 2024, which proposes a tax rate of 50-100 rupees per tn of coal depending on the grade.
With states getting the right to set the royalty rates, royalty rates will differ across states and this will lead to different final coal prices across different states. After that, the coal mined will be used by power generating companies to produce power which would be supplied through the National Power Grid and will be used by different states.
At 1458 IST, shares of Coal India were up nearly 2% at 513.95 rupees on the National Stock Exchange. End
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