Odisha has told the Centre any change in how the average sale price (ASP) is calculated, based on which royalty and other mining related cesses are charged, must be prospective and cannot be applicable to the iron ore mines auctioned last year.
In a letter to Additional Secretary Sanjay Lohiya, on the subject of “royalty on royalty”, Odisha’s Principal Secretary, Surendra Kumar, warned that retrospective changes, by the most conservative estimates, will cost the state INR 3,500 crore or more per year, anywhere between INR 35,000 – 40,000 crore in the next decade and around INR 2 lakh crore over the lifetime of the mines it auctioned in 2020.
Royalty over royalty
Mining companies have for years been pointing out that their invoices to buyers is inclusive of royalty, DMF and other dues they owe the state which are used to arrive at the ASP with no deduction for these taxes. This essentially means they end up paying royalty for the gross amount and royalty over the royalty component of their invoices too. The financial implications are considerably higher for mines bagged through auctions where a premium – sometimes higher than a 100% and again calculated on IBM’s declared ASP – is also to be paid.
The Indian Bureau of Mines (IBM), which publishes the ASP, is bound by the Mineral Concession Rules whose definition of sale value is the gross amount payable by the purchaser as indicated in the sales invoice where the sale transaction is at an arm’s length basis and the price is the sole consideration for the sale, excluding taxes, if any. No deduction from the gross amount can be made in respect of royalty, payments to the District Mineral Foundation (DMF) and payments to the National Mineral Exploration Trust (NMET).
While it designs a new National Mineral Index, the Centre is trying to fix these issues.
Odisha’s Principal Secretary, Mines, pointed out that mines auctioned last year in Odisha were done, as iron ore sellers and buyers always have, factoring in the cumulative 16.8% that would have to be paid towards royalty, DMF and NMET. “If the ‘royalty on royalty’ issue is given any retrospective effect, this will lead to lowering of the ASP by almost 14.4% for newly auctioned lessees which will reduce the premium payable by the new lessees, causing huge loss of revenue to the state government,” he said.
A “practical solution”, he offered, is that future auctions include a condition requiring premiums to be paid, “on the average sale price, as published by IBM for the corresponding month of sale after deduction of the amount towards royalty, DMF and NMET as applicable during that month.” Any change to be notified must be done with clear stipulations that it does not have any retrospective effect. Odisha also wants IBM to take into cognisance any abnormally low or abnormally high sale prices, and preferably publish the ASP within the next month.
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