Chennai: What does the mining industry expect from the Budget? That there would be measures incentivising domestic exploration and mining activity, and also help in making the export of minerals from India more competitive internationally, says Keval Doshi, Tax Partner, Ernst & Young.
Minerals are a valuable natural resource and are a vital raw material for infrastructure, capital goods, energy generation and basic industries, he reminds, during a recent email interaction with Business Line.
“Given that the exploration of minerals play a pivotal role in the country’s economic development, the Government of India announced the National Mineral Policy 2008, which when fully implemented is expected to give a boost to prospecting and mining activities in India.”
Doshi cites, as example, coal mining; several coal mines in India are currently tangled in litigation or are not being mined due to lack of efficient infrastructure support which makes mining unviable, he rues.
“As India faces a shortfall in power generation, large power projects are being set up, which may need coal as primary input. Given the limited supply of domestic coal in the current scenario, India will soon emerge as a large importer.”
To manage power production costs, power producers are acquiring coal mines in neighbouring countries, observes Doshi. “A large amount of capital will be deployed in developing the coal mines, building capital equipment, building infrastructure for transportation and logistics etc. by Indian entrepreneurs to secure coal supplies.”
In addition to investments, India will also need valuable foreign exchange resources to foot the coal import bill, so that the plants continue to produce power for the Indian consumer, he cautions. “Some of the issues plaguing the sector can be corrected if domestic exploration and mining is encouraged through fiscal and policy measures.”
Introducing tax reforms is critical for encouraging long-term investments into the mining sector, Doshi avers; for, growth in the domestic mining industry will not only help in economic development, but also conserve valuable foreign exchange.
Excerpts from the interview, in which Doshi touches upon some of the measures that would encourage greater domestic investments in this sector.
On tax holiday for mining activity.
A tax holiday on corporate income would improve the internal rate of return (IRR) ratios for projects which may otherwise not be viable. Similar provisions exist under Section 80IB of the Income-tax Act, 1961 for activities relating to exploration of mineral oil.
On promoting exploration activities.
The cost of extracting minerals can be reduced by identifying new mining areas with higher grade of minerals, making mining in India economically beneficial. There is an expectation from the Government to encourage exploration activities by permitting deductibility of exploration-related expenditure as and when they incur.
Currently, costs incurred on prospecting, extraction or production of any minerals during the year, in which the taxpayer begins commercial production, are to be clubbed with similar expenses incurred over the previous four years and the total amortised over a 10-year period.
Many countries, such as Australia and Malaysia, already allow expenditure incurred for exploration and prospecting as immediately deductible.
On deduction for provisioning towards mine closure expenses.
There’s no refuting the fact, that mining activity causes environmental damage. The Indian Government has made it mandatory to undertake appropriate mine closure in a responsible way, such that the rehabilitation of land does not become a burden to society after the mining operation.
At present, costs incurred on mine closure are allowed only in the year in which the expenses are incurred and there is no provision for set-off of estimated mine closure expenses against the profits, while the mines are generating taxable profits.
Introducing provisions that help in reducing current taxes by allowing deduction of mine closure expenses on provisional basis will help the industry from a liquidity standpoint. It may be noted, that a similar beneficial provision already exists under Section 33ABA of the Act for the oil and petroleum industry.
On the need for enhanced depreciation on capital equipment.
Investments in capital equipment which help in improving productivity and enhance the safety of mine workers can be encouraged through accelerated depreciation. Investment in commercial and passenger vehicles is currently being incentivised through similar provisions.
On tax break for investment in R&D.
Investments in technology can be encouraged if expenditure incurred on the above areas is given a weighted tax deduction. Australia, for example, allows a 125 per cent tax break on qualified R&D (research and development) expenditure. This will result in improving productivity, enable mining operations to be environment-friendly, and improve realisation through better purity and quality standards
On reduction of excise duty/ custom duty.
The Government can also ease the burden of high capital costs for ‘extraction’ and ‘earthmoving’ equipment by reducing excise duty on domestically-produced equipment and reduce customs duty rates on imported capital equipment. Excise/custom duties paid by mining companies being non-creditable in most cases, add to the cost of the equipment.
Source : The Hindu