Mining tax: Tata Steel, HZL explore legal options following Supreme Court ruling

Delhi/Mumbai: Top Indian metal and mining companies such as Tata Steel and Hindustan Zinc (HZL) are waiting to see how things unfold following the recent Supreme Court judgment that allowed states to tax minerals mined in their jurisdiction on top of central levies.

However, they are not averse to taking legal recourse if things get uncomfortable, their top executives told Mint.

Tata Steel will explore legal options regarding any dues that may arise if the Supreme Court rules that its judgment will be applicable retrospectively, while Hindustan Zinc (HZL) will also knock on the doors of the courts if any immoderate demands are raised.

On 25 July, a nine-judge constitution bench of the Supreme Court upheld the rights of states to collect tax on mining activities and held that royalty paid to states on minerals does not qualify as tax. The apex court reserved its verdict on the retrospective applicability of the rule.

“If the government (levies) anything which is not in the Constitution, then we can go to the court; but if it is (levying) something in line with the Supreme Court (judgment), it will be for everyone," said Sandeep Modi, CFO of HZL, adding that there is no material impact on the company from retrospective taxation.

To be sure, solicitor general Tushar Mehta said in the Supreme Court last Tuesday that such a verdict if applied retrospectively could impose a financial burden of ₹70,000-80,000 crore on public sector units (PSUs).

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Tata Steel has even noted contingent liabilities of ₹17,347 crore in its financial statements pending clarity on the matter, the company said in a regulatory disclosure on Friday.

“There's no demand (raised against us). So, it's not necessary that we have to pay that amount. But we have to fight that now. So, there'll be a lot of litigation," T.V. Narendran, Tata Steel’s managing director, told Mint during a post-earnings call.

The company had in FY06 received demands amounting to ₹129 crore in terms of state levies on its mines in Odisha, and had challenged the constitutional validity of the levies in the High Court of Odisha. The High Court had held that the state does not have the authority to levy taxes on minerals. This judgment was challenged by the state of Odisha in the apex court.

Impact of the judgment

Industry experts believe that if the ruling is made retrospective, it would be difficult for companies to pass on the liability to end users. In some cases, the state taxes payable would be higher than the net worth of concerned companies, which could lead to bankruptcy.

At the same time, executives of Tata Steel and Hindustan Zinc said that even when levied prospectively, these costs would have a cascading effect on the industry and trickle down to consumers.

“Most of these corporate entities are now sincerely hoping that the SC should levy this only prospectively," said S.R. Patnaik, partner (head - taxation) at law firm Cyril Amarchand Mangaldas.

Also read |  ‘Royalty not a tax,’ says Supreme Court on states' power on mineral rights

“If the SC decides this levy to be made retrospectively, it cannot be presumed to be unconstitutional because the SC is merely interpreting the constitution and according to its decision, the present constitution requires that the beneficiaries should be liable to pay royalty retrospectively," he added.

While companies are seeking legal counsel, experts are not very hopeful. “As far as it concerns demands already made by the states, there is hardly any legal recourse for companies. In fact, some companies have already provisioned for it," said Aakash Bajaj, partner at law firm Khaitan & Co. Bajaj represented Lafarge India in the company's dispute with the state of Rajasthan over dues similar to the Tata Steel-Odisha case, and several other cases over the years on which the Supreme Court announced its judgment last month.

“However, if states take an adventurous interpretation of the judgment and now raise demands, that can be challenged in the courts," he added.

The GST angle

Experts also fear that there could be an incidence of goods and services tax (GST) on the royalties being charged by states after the Supreme Court ruled that royalties are not a tax.

“There are also questions relating to the demand for payment of GST on royalty, which had been stayed (we act on such matters in Karnataka) on the ground that royalty was a tax. If the judgment is made retrospective, demands for arrears of GST may arise," said Aditya Narayan, managing partner at Saakshya Law.

Also read |  Supreme Court upholds states' power to tax minerals

There could be prolonged litigation and economic uncertainty, and the episode might even deter investments and strain companies financially, experts said.

“Because of significant long-term impact, foreign investors would always want certainty in the interpretation of such provisions so that they do not have to deal with any similar situation in the near future," said Patnaik.

Neha Joshi in Mumbai contributed to this story.