Ad valorem to make ore royalty heavier

NEW DELHI: The government is close to finalising a new system of royalty payments for minerals which will double the revenue that states earn but increase the burden on companies that rely on raw materials such as iron ore.

Mineral extractors will have to pay royalty based on the market value of the commodity instead of the fixed rates that are charged now, a proposal finalised by the mines ministry shows.

The new royalty structure for major minerals will soon be sent to the Cabinet for approval, an official in the mines ministry said. Earlier this month, a committee of secretaries reviewed the royalty proposals finalised last year and approved them without any major changes.

The new structure will result in a 10% royalty payout on iron ore of all grades instead of the Rs 13-27 per tonne that states have been getting, depending on the quality of the ore. Revenue for states from the vital input for steel is likely to increase from Rs 250 crore to over Rs 1,500 crore per year.

���Higher royalty payments will certainly impact our expansion projects as lower realisations and even lower margins now leave little with the companies,��� said an official of a leading private sector steel company.

The mines ministry estimated the total value of mineral production during 2008-09 at Rs 1.14 lakh crore. Orissa, Chhattisgarh, Jharkhand and Madhya Pradesh are India���s top mineral producing states and they have been pressing the Union government for about two years now to revise the royalty rates.

Kewal Doshi, a partner at consultancy firm Ernst & Young said the new royalty regime could adversely impact mining and metals companies.

���While the pressure on margins of companies may be offset due to lower raw material prices, the very fact that demand has not picked up in a big way may impact them in the medium term,��� he said.

Along with iron ore, the new system will lead to changed royalty rates for limestone, zinc, bauxite, manganese, diamond and uranium.

States��� royalty earnings on non-coal minerals are expected to double from level Rs 2,014 crore (at 2006-07 production levels) because of the new structure.

Royalty rates were last modified nearly five years ago and a change has been due since 2007.