Compilation of Royalty on Iron ore in different States of India- Anomaly thereof

The methodology of Royalty collections on Iron ore and many other mineral commodities were shifted from Absolute value per tonne basis to Percentage of Average Sales price per tonne basis. The Royalty rate on Iron ore accordingly changed from Rs. 8 – Rs. 27/ tonne prevailing since 2004 to 10% of Average Sales price on ad valorem basis from August 2009, which was increased to 15% of Average Sale price on ad Valorem basis from September 2014 as per the Gazette notifications published by Govt. of India from time to time.

The monthly average Iron ore sales price for different states and on All India basis is published by Indian Bureau of Mines (IBM) on its website.

Administration of Royalty by IBM

Royalty is the payment of tax to the Government (owner of mineral) for the privilege granted for extraction and processing of minerals.

The system of levying of royalties for Iron ore is enacted in the Section 9 (3) of Mines and Minerals (Regulation & Development) Act (MMDR) 1957. The relevant provisions of Royalty on minerals are administered under Rule 64 of Mineral Concession Rules (MCR) 1960 and further amended on 10th December 2009. Royalty rates can be changed by Govt of India once in a period of three years. GOI changed the royalty regime from flat rate to Ad Valorem basis vide it notification dated 17th Aug 2009.

  • The Indian Bureau of Mines has been made responsible to publish the rate of minerals to enable collection of royalty.
  • IBM arrives at the average sale prices for different product and grades of iron ore, applicable to respective states, based on the monthly returns filed by the leaseholders, as per the practice
    adopted by IBM, the returns filed in Form- F1 by the top 10 Merchant Iron ore miners of a particular state are considered for computation of Average Sales price on Ad valorem basis for that particular state for that particular month.
  • The manner of payment of royalty on ad valorem basis was last notified by Ministry of Mines in their Official Gazette Notification No. GSR 883(E) dtd. 10.12.2009 through amendment of Rule 64 D of MCR, 1960 and as reproduced below –

Royalty = Sale price of mineral (grade-wise and State-wise) published by IBM X Rate of royalty (in
percentage – currently 10%) X Total quantity of mineral grade produced/despatched

  • Provided that if for a particular mineral, the information for a State for a particular month is not published by the Indian Bureau of Mines, the latest information available for that mineral in the State shall be referred, failing which the latest information from All India figures of price for the mineral shall be referred.

Provision for declaration of Sales price by Iron ore Miners

In its Gazette notification dated 19th April 2016 published by Ministry of Mines, the methodology of declaration of Sales price under sub-rule (8) (II) is changed as follows:

“Where domestic sale has occurred, the total of sale value of the mineral less the actual expenditure incurred towards transportation, loading, unloading, rent for the plot at the stocking yard, charges for sampling and analysis and other charges beyond mining lease area as notified by the IBM from time to time, divided by the total quantity sold”

This effectively means that Iron ore consumers are made to pay 15% Royalty over Royalty already charged, since it is provisioned not to be deducted from the Sales price.

Iron ore Sales methodology by Merchant miners in major States of India:

Iron ore Pricing methodology: Orissa

In Orissa, the sale price administered by major merchant Iron ore miners is normally inclusive of Royalty, DMF and NMET and the Royalty is not charged separately to the Iron ore consumers. The values declared by Major miners as per Form F-1 are more or less in line with the Average Sales price for the months of Jan’18 and Feb18 which are taken as example below:

Iron Ore Price

Iron ore Pricing methodology: KARNATAKA

In Karnataka, NMDC as well as other Iron ore miners are selling Iron ore basis the Supreme Court appointed Monitoring Committee guidelines. The Iron ore prices are determined by the bids received which is exclusive of Royalty, FDT, DMF, NMET, etc.

The basic Iron ore price component only is treated as “Sale price”. Accordingly, Royalty is charged to customers @15% on the Basic price of Iron ore. It can be seen from the table given, there is huge differences between the Bid price and Price declared by IBM for the corresponding months of            Jan-Feb’18:


Fe% GRADE WISE SUMMARY- KARNATAKA

Iron Ore Grade Wise

Iron ore Pricing methodology: CHHATTISGARH

NMDC is the largest merchant Iron ore miner in the state of Chhattisgarh. Iron ore Prices fixed by NMDC is on FOR/ FOT basis and exclusive of Royalty, Infrastructure and Environmental Development cess, Labour Welfare Cess, Forest Permit fee, FDT, DMF, NMET, GST, duties, any other statutory levies, taxes etc.

Observation

It can be seen from the Chart below, the effect of change in Sales price declaration methodology, whereby the increasing Gap in NMDC Fines Base Price for Fe 64% and the same declared by IBM for Chhattisgarh for Fe 62-65%

Iron Ore Price


 

Conclusion

  • From the above three scenarios it can be concluded that there is huge differences in the manner in which Iron ore sales price is being declared to IBM in Form F-1.
  • As a result of Charging Royalty over Royalty from April 2016, the IBM declared Average Sales price (Fe 62-65%) is on increasing trend vis-à-vis NMDC Base price for Fines (Fe 64%)
  • In Odisha prices quoted are inclusive of royalties, accordingly both Form F-1 and IBM declared Prices are matching since charging Royalty over Royalty is inbuilt in Price mechanism.
  • However, in those states where Sales is exclusive of Royalty, there are differences in IBM
    declared price and Actual sales/ bid price, which needs to be streamlined.

This needs to be addressed immediately by IBM/ Ministry of Mines so that there is no loss to the Iron ore consumers as well as the State and a uniform Pricing/Sales/ Declaration methodology is administered across India.

Royalty is the payment of tax to the Government (owner of mineral) for the privilege granted for extraction and processing of minerals. The system of levying of royalties for Iron ore is enacted in the Section 9 (3) of Mines and Minerals (Regulation & Development) Act (MMDR) 1957.