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POV : Will the proposed 26 percent profit sharing clause in the mining bill speed up the production or scare away investors?

By , ,
Industry : Coal

A draft law has been approved by a ministerial panel headed by Finance Minister Pranab Mukherjee which, if passed by the Cabinet, will make it mandatory for the coal producers to share 26 percent of their profits with the population affected by the project. The proposed law has raised objections from the mining industry, fearing that it would result in heavy taxation, which, in turn, would diminish the investments in the sector. However, there are many who are in favour of it, including the largest coal producer, Coal India Ltd.

Dipesh Dipu,Director - Consulting | Mining,Deloitte Touche Tohmatsu India Pvt. Ltd.

The mining industry is unique in some sense because of the magnitude of the environmental and social problems associated with this industry. A number of specific characteristics of the mining industry contribute to these problems. Choices of locations are not flexible, so often mining takes place in ecologically and socially sensitive areas. Particularly in those cases, the damage tends to be irreversible. Another characteristic of the mining companies is that they tend to be seen as an economically strategic sector. These two parameters tend to imply a conflict and a risk in terms of corporate accountability. That said, the mining industry has been moving from being a voluntary and marginal contributor to the society—it is part of becoming a partner in social development and making a significant impact on the standard of life for the project affected people. The Mines and Minerals (Development & Regulation) Bill that stipulates that coal mining companies will have to share 26 percent of their net profit for the purpose of the social balancing act. While there cannot be two opinions about compensating the project affected people, the stipulation of 26 percent share of profit does appear steep.

It may have an impact on investment in coal mining sector. And investments in mining ventures should not be viewed in isolation. Any impact on the investment in such a mining venture must consider the micro-economic impact of the venture. It would be stating the obvious that minerals produced from mining ventures are typically consumed in manufacturing sector and the chain of value additions end with the ultimate consumer. In case of a coal mine, the investment in mine is likely to be coupled with investment in power generation, steel or cement. If we take the example of coal mining and power generation, for every Rupee invested in coal mine, typically, five-fold investment goes into power generation plant. This can be enlarged, if the project needs infrastructure investments as well. Similar is the multiplier effect on generation of employment and these projects also help create local business opportunities and employment in these ancillaries. The local business development occurs through the investment in a coal mine and addition of power project in the portfolio, which enhances levels of economic activities and improvement in purchasing power of people in the region.

There is a difference between tax and social contribution, but the mandatory nature of the social contribution can make it appear similar to tax. Currently, coal mining in India attracts following taxes and contributions: Corporate income tax – 33 percent; Royalty – depends on the coal quality/grade; Dead rents – lease rents for land; Corporate social responsibility commitments (percent on revenues) – largely voluntary; Education cess – two percent surcharge; Environment levies – for coal, it is Rupees 50 per tonne of raw coal mined; and Indirect taxes – on consumables. If the 26 percent mandatory profit share is implemented, the taxes and mandatory contributions will account for more than half of the cost of coal production. While costs per se may not be a concern as much as the capacity to pass these costs on to the final consumer, which is where, the industry concerns may lay.

It is observed that raising the level of taxation brings the cash flows forward to the present from its mineral sector, which otherwise is due over time. Reason for this being the observation that tax hike always raises government revenues over the first few years from its promulgation. This is likely to discourage exploration and mine development in the longer run, and so reduces tax revenues on a life cycle basis.

The provision for profit share is likely to have limited success in addressing long-term issues that confront the industry and its investment environment, as hence, the same project affected people. Considering the macro-economic parameters, in long run, the industry and the government, as also the other stakeholders, including project affected people are likely to witness lower realization from a higher imposed contribution required from the mining projects. The provision, as it stands, is likely to erode the attractiveness of coal mining operations and may even act as a deterrent to investments into the marginally profitable coal blocks. It may help that the proposed profit taxes should be dropped in favour of enhanced but fair compensation to project affected people. Fair compensation for the project affected people should be based on earning capacity from that land keeping in view the market conditions for requirement of land. It may be suggested that in addition to compensation for land, the displaced should get annuity for life of the lease period at a rate agreed by the mining company, project affected people and the government.

Chandra Bhushan,Deputy Director General,Centre for Science and Environment

The profit sharing mechanism is practiced everywhere in the world. In India, this would be a good starting point for the development to take place as the affected population has not gained anything. There is no infrastructure, no development and minimal employment. At the same time, while their resources are exploited, the surrounding environment is destroyed.

Such a mechanism is accepted internationally and is institutionalised. Mining is an activity with a huge development cost and all these companies involved in the mining business are earning large amount of money with a profit margin of 50 percent, without any proper sharing of this profit with the people who suffer the most because of the corporate mining activities.

Those who think that the regulation would make India, the most heavily taxed country in the world, forget about the massive profit margin that the mining companies make. Is this not a contradiction in itself? The statements that India would become the most heavily taxed are not true, as the effective tax rate in India is lower than 35 percent while some countries have close to 49 percent.

Whosoever says that the Bill will result in huge disparity and dissatisfaction among the rest of the population, has not understood the mechanism of the Bill. The mechanism proposes that the money will go to the district level and will then be equally distributed between the people. Nobody will get unduly benefited. We have pockets of disparity and oceans of impoverishments.

NA,CGM,Coal India Ltd.

This new profit sharing regulation will not affect the revenue of the CIL much as the company is already spending a lot of money on its CSR activities. Coal India already spends five percent of its profits on the CSR activities and now, the only difference would be that the same money which is spent all across India by the company would have a larger part of it reserved for the project affected areas. Consequently, the budget of the Coal India would more or less remain the same.

CIL has 471 mines. The contribution now will be directed to project affected people where new mines have been opened. This 26 percent is a concern for the private sector. The company is in favour of the profit sharing regulation as the fact remains that the businesses have not done a serious job for the project affected people. This, in turn, has resulted in a very serious and chaotic situation for the entire country. Land is the only source of income for these project affected people, which, turns into high hopes from the new projects.

Also, another point of concern is, what the companies pay when it comes to land prices. The actual registered cost of the land is much below the actual market value of the land. The registered value is almost 20 percent of the actual value. So, the price paid by the companies is the registered value of the land which is much lower. The new proposed regulation stipulates that the companies pay six times the registered value, which is going to be of much help in mitigating the fears of the people.

When the corporate derives immense benefit from all the mineral resources available in the land, the people to whom the land belongs should also benefit. There has to be a balanced approach. Till now, only corporate were benefited. We hope that this Bill will help in changing the dynamics.

The only thing that can be debated is the 26 percent figure which can be adjusted. However, on principle, we have to agree that unless we give a proper share to these people, there is bound to be trouble.

(InfralineEnergy thanks Dipesh Dipu, Chandra Bhushan and Coal India Ltd. for sharing their insights. Infraline introduces "Points of View" as an initiative for encouraging dialogue between various stakeholders of the Indian energy sector on contemporary subjects. If you wish to participate in such initiative, please write to feedback@infraline.com)

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