National Mineral Policy 2006 - Department of Mines

In a system of ad valorem rates of royalty, revision of rates become necessary only whenfundamental changes take place in the mineral economy, justifying a review of the rates. InIndia, there is unanimity among the states now in the demand that royalty rates should beshifted from tonnage to ad valorem. The main problem with ad valorem royalty is thedetermination of ‘price’ or value on which the royalty rate is to be applied. In the case ofmetals such as aluminium, gold, silver, copper, lead, zinc, and tin, which are traded atinternational commodity exchanges (London Metal Exchange), the determination of value ofthe corresponding mineral may not be very difficult but for others where no such benchmarkis available the determination of value for the purpose of royalty is problematic.6.10 In India, this problem is being faced in the case of minerals that do not haveinternational benchmark prices. Although, IBM publishes national and state level monthlyaverage values of different minerals for calculation of ad valorem royalty the system is notfoolproof. This is because IBM merely picks up the figures from the returns filed by theminers and the values given there are invariably based on pit mouth sales reported by theminers themselves in their returns filed with IBM. These could well be under-reported.Further, in mines owned by the processing industry, there could be a problem of transferpricing and the price shown in the books of account cannot be said to be the arm’s-lengthprice.6.11 Nevertheless, there is a strong case for the royalty regime in India to move stronglytowards the ad valorem system to augment revenues of the states. In the case of someminerals, international prices have increased several folds over short time periods. Unlessroyalty is fixed on an ad valorem basis, governments do not benefit from the increase in theprice. Iron ore prices in the international market in particular have risen steeply and the advalorem incidence of the specific rates has fallen to 1–2 per cent in 2004–05 from 5–10 percent prevailing in the years 2002–04. It is the ad valorem incidence of royalty that determinesthe capacity of the mining company to bear the taxation. Moreover, the state governments areconsiderably short-changed by a system of specific rates in situations of rapid rise in price, ashave existed in minerals in the last few years. If the ad valorem rates were fixed at 7.5 percent for all grades of iron ore, the revenue from the level of production of 142 million tonneswould have been about Rs 1600 crore, assuming Rs 1500 per tonne as the average sale priceor value. On the same assumption, the royalty revenue from iron ore would have been Rs 260crore instead of Rs 42 crore in Chhattisgarh, Rs 180 crore instead of Rs 23 crore in124