Tax windfall profits

The mines ministry has done well to propose a windfall tax on minerals like iron ore. Mining companies rake in hefty profits from rising prices of iron ore, which is available dirt cheap from captive mines.

The government has a right to claim a slice of the profits as custodian, on behalf of the people, of the country’s natural resources.

A windfall tax is perfectly in order on extractive industries where profits are a creation of patronage, flawed policy, often coercion and the fortunes of global demand, rather than of enterprise, intelligent risk-taking, innovation or excellence in execution. In tandem, the Centre should also evolve a holistic policy on taxation of natural resources to ensure that it gets a fair share in the profits made by companies that extract natural resources.

Globally, threequarters of the profits from natural resources go to the government and the balance to the licencee. The country should aim towards this. A sound policy framework on taxation of natural resources will be a long-term solution and can be incorporated in new contracts. Today, mining companies pay royalty that accrues to the states.

Royalty rates are ad-valorem, which is welcome. However, the value on which the tax is levied is artificially low since it is on the first sale. A policy change is a must and royalty rates should be benchmarked to the final export price, if it is exported.

This will change the fiscal health of states like Orissa, Jharkhand and Chhattisgarh that have to spend more to rehabilitate people. Revenues from the windfall tax on mining will, however, accrue to the Centre. One way is to levy an extra charge on the corporate tax. Britain followed this model when it imposed a windfall tax on North Sea oil producers. Now, Australia has proposed a resources rent tax for the mining sector.

The government has a strong case to hike its share of the revenue generated from natural resources. Iron ore prices have risen by more than 170% over the last five to six years, while production costs haven’t risen proportionately. Mining companies have had a windfall and they should share the profits with the Centre.