New Royalty Rates For Coal and Lignite

Coal doesn’t seem to be providing any respite to the power producers. The Cabinet Committee on Economic Affairs (CCEA) has approved a proposal that will increase the royalty on coal and lignite. According to the mines and minerals’ regulation, the royalty rates can be increased once in three years. The government had not increased the royalty on coal and lignite since 2007. The request to revise these rates has come mainly from the coal producing states. According to the new regulation, the government is now moving from the present hybrid formula system to the ad-valorem system.

As per the new system, the royalty rates will rise to 14 per cent and 6 per cent on coal and lignite respectively. The royalty rates will be adjusted for local taxes such as cess or other taxes levied in the coal producing states. Due to this the new rates would not be applicable in West Bengal unless the cess levied on coal is not withdrawn. The states which will benefit from this are Jharkhand, Andhra Pradesh, Madhya Pradesh, Uttar Pradesh, Tamil Nadu, Orissa, Nagaland, Meghalaya, Maharashtra, Chhattisgarh, Assam and Arunachal Pradesh.

The new royalty would increase mining revenues by Rs 1,050 crore to Rs 6,980 crore. It is expected that on an average the revenues in these states would increase by 17.31 per cent for coal and 14.53 per cent for lignite. The new rates are applicable from immediate effect. The government is seen to be very serious about profitability in the power sector for new investments but there are some misgivings too. For the record, the government has exempted the 5 per cent custom duty on imported coal and gas for the next two years and has also provided depreciation benefits for the power plants hat have been commissioned in the last fiscal or will be commissioned in the future.

Besides, the government has also forced Coal India to sign fuel supply agreements with 80 per cent trigger level. Though this looks positive, actions like increasing the royalty rates will neutralize the benefits announced in the budget. Coal India is also expected to move to new pricing norms that will increase the prices of coal. As these rates are applicable immediately, Coal India will also have to pay royalty with immediate effect. The collection of the payments, however, takes time and hence this will create cash flow problems for Coal India. For the power sector this does not seem positive.