Karnataka’s new minerals tax stumps iron ore mining companies

A proposed legislative bill in Karnataka could triple the tax burden on miners operating pre-auction era iron ore mines, potentially squeezing their margins and triggering ripple effects on steel prices, according to experts.

The Karnataka (Mineral Rights and Mineral Bearing Land) Tax Bill, 2024, introduced in the state legislature on Monday, aims to impose two new taxes: one on mineral-bearing land and another on mineral rights for mining leases.

The bill has drawn sharp reactions from industry observers, as major players brace for its financial impact.

State-owned NMDC Ltd, along with private mining giants Vedanta Ltd and Sandur Manganese and Iron Ores Ltd, are the largest operators of pre-auction era mines in Karnataka and will bear the brunt of the proposed tax. Together, these companies account for a significant portion of Karnataka’s iron ore production, which makes up roughly 15% of India’s annual output of 280 million tonnes, according to BigMint, a market intelligence firm.

For private companies like Vedanta and Sandur, this would mean paying a mineral rights tax equivalent to three times the royalty currently paid to the government. With royalties fixed at 15% of the monthly sales price published by the Indian Bureau of Mines (IBM), the proposed tax would hike production costs by 45%.

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Vedanta and Sandur, mining 5.6 million tonnes and 3.8 million tonnes of iron ore annually, respectively, face substantial cost pressures. Smaller mining firms operating under pre-auction leases will also be affected, amplifying concerns across the sector.

In comparison, public sector companies like NMDC will be taxed at 1.5 times the royalty rate, translating to a 22.5% cost increase. NMDC, which produces 13-14 million tonnes of iron ore per year in the state, is the largest public sector miner affected.

Shares of NMDC plummeted 6.09% on Wednesday, while Vedanta and Sandur saw losses of 1.21% and 3.93%, respectively, extending the broader market’s third consecutive session of losses.

Auctioned vs non-auctioned mines

The proposed levy aims to narrow the cost gap between auctioned and pre-auction mines. The Mines and Minerals Development and Regulation (MMDR) Act, 2015, transitioned India’s mining allocation from an application-based system to an auction-based process.

The bill follows a landmark ruling by a nine-member constitutional bench of the Supreme Court in July, which clarified that states have the authority to tax mineral rights and mineral-bearing land within their territory, settling a decades-old dispute. The court also permitted states to recover past tax dues on mineral rights from as far back as 1 April 2005 but mandated the waiver of interest and penalties on such dues before 25 July 2024. To ease the burden, it allowed staggered payments over 12 years starting 1 April 2026.

Companies operating auctioned mines will face a minimal additional tax of ₹1 per tonne. Among them, JSW Steel, producing 8-9 million tonnes of iron ore annually in Karnataka, stands as the largest player in this category.

Unlike pre-auction mine owners, companies winning mining rights through auctions pay a hefty premium—often exceeding 100% of the IBM’s monthly sales price—significantly increasing their operating costs.

“This will bring some parity between auctioned and non-auctioned mines. Right now, non-auctioned mines are not paying any premium, so there is a high disparity in their cost structures,” said Dhruv Goel, the chief executive, BigMint.

Ripple effects on steel prices

The proposed tax hikes are expected to send shockwaves through the steel industry, as rising iron ore costs could erode margins for steelmakers and increase production costs. 

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JSW Steel, India’s largest steelmaker by capacity, sources significant quantities of iron ore from NMDC and could feel the pinch of higher prices.

The additional cost burden could also make domestic steel less competitive compared to cheaper imports, a growing concern for Indian steelmakers already grappling with rising imports.

“This will, if enacted, have short term disruptions for miners and may have long term impact on their margins. They have the option to pass on the cost, which is not easy as it seems. The other likely thing is they may choose to cut down production to avoid paying more taxes,” Goel said.

The tax could lead some miners to reduce or cease operations in Karnataka altogether, an industry executive warned on condition of anonymity. Shifting production to other states with lower taxes may become a viable alternative, potentially altering the competitive dynamics of India’s mining sector.

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The Karnataka government is reportedly looking to generate ₹4,207.95 crore of additional revenue through mineral rights tax, along with an estimated ₹506 crore from taxes on mineral-bearing land.