We dig federalism, but why retro tax?

The Supreme Court's verdict on Wednesday enabling state governments to tax mining and related activities retrospectively with respect to transactions made after April 1, 2005, could have a far-reaching impact on input costs across the economic value chain and create stresses in federalism. The most affected area would be electricity, where the higher cost of mining coal would eventually feed into prices overall.

If tariffs are deliberately suppressed for political reasons, as the historical record suggests, stress will grow in the power industry, affecting capacity building. Majority of the country's states are coal-deficient and will make a case for higher imports, thereby affecting the country's trade balance.

Although most of these effects will show up over time, and can be mitigated with policy correction, retrospective tax on minerals could have a more immediate impact on the health of mining companies and supply-side inflation.


Corporate profitability is likely to be affected because of the large exposure of Indian companies to resources. The public sector is particularly vulnerable to retrospective minerals taxation, as are most of large private conglomerates that derive a bulk of their profits through resource extraction.

Their ability to pass on prices is significant given the concentration of production of basic materials such as steel, aluminium and cement. Even with flexibility to pay accumulated tax demands in instalments, the outgo under this head will be considerable for core industries.

Some of these costs will filter into the Centre's accelerated capex programme, tempering its ability to stimulate private investment.

Since federalism was the principle guiding the Supreme Court's judgment on allowing states to tax minerals in their territory, the immediate effects could have been mitigated by providing them the facility prospectively.

The waiver on interest and penalties do not offer adequate cushion against economic shock. The immediate stock market reaction to the ruling does not seem exaggerated.