The Hindu Business Line : Proper evaluation process mooted for royalty on minerals

"While the ad valorem system for fixing royalty on underground minerals could be a welcome step, ground realities and multiple pricing of the product has to be taken into consideration."

New Delhi , July 24

The Federation of Indian Mineral Industries (FIMI) wants the Union Government to devise a proper evaluation process before shifting from the present volume-based royalty structure for mined minerals to an ad valorem basis as suggested by a panel set up by the Planning Commission.

As of now, mining companies pay a fixed sum as royalty to the State Governments for every tonne of mineral mined and it is not linked to the price at which the company sells it.

The Anwarul Hoda Committee set up by the Planning Commission has suggested that the royalty should be fixed on the value of the mineral produced that would lead to substantial increase in Government revenues.

The FIMI President, Mr D.K. Sahni, told newspersons here that while the ad valorem system for fixing royalty on underground minerals could be a welcome step, ground realities and multiple pricing of the product has to be taken into consideration.

The price at which a particular mineral is sold in the spot market and the price for long-term contracts differ.

While fixing the ad valorem tax, this has to be taken into consideration because the companies do offer concessions to large buyers who source in bulk amounts over a period of time, he said.

Status of a new player

Also, Mr Sahni pointed out that two companies may be selling the same mineral ore to the same buyer, whether domestic or foreign at the same price but a newer company might have to pay a commission to a middleman because it does not have the necessary marketing contacts, while the older player would have a direct link with the buyer. "In such a case, whether the commission paid would be deducted from the price and the tax would be charged on the price the company actually receives or it would be on the entire amount requires to be considered," he said.

VAT discrepancies

FIMI officials pointed out how the uniform value added tax (VAT) was creating discrepancies in the hotel industry.

"In Delhi, the hotels have to pay the VAT to the Government on the room rents charged by them. Now, the hotel charges higher for a fly by night guest than compared to a company that assures 100 nights booking a year.

But the Government is charging the VAT on the officially quoted price of the room and as such the very objective of the VAT gets defeated," the official said.

The same could happen in case of introducing ad valorem tax in the mining sector since there is no officially quoted price for the minerals as prices keep changing with the demand-supply scenario.

FIMI officials, however, remained non-committal on having the reference point for the ad valorem duty structure of 7.5 per cent as suggested by the Hoda Committee.