With the Supreme Court holding that State taxes on mining activities can apply retrospectively from April 1, 2005, the impact of remitting past dues on Indian metal and mining players’ finances is likely to be limited as the Court has provided them with a 12-year timeframe to do so, two major ratings firms said.

However, if States impose additional mining taxes prospectively as well, industry players with dented cash flows on account of past dues, could be compelled to recalibrate their capital spending plans, said Moody’s Ratings, which termed the retrospective taxes a ‘credit negative’ for companies such as Tata Steel, UltraTech Cement, JSW Steel and Vedanta Resources.

“We see increased risks from a sustained weakening of the companies’ EBITDA margins due to the prospective levies,” Fitch Ratings observed. Steel and mining sector companies are more at risk from state-imposed taxes than sectors such as power and cement, as the former have limited ability to pass on the potential increase in operating costs, with their products tracking global prices, it pointed out.

“Tata Steel and JSW Steel will incur additional operating costs because they produce iron ore and coking coal from their mines to supply to their steel plants,” Moody’s reckoned. “The liabilities for each company will vary, depending on the decisions made by each of the state governments. We expect the completion of brownfield expansion projects and hence higher sales volume at Tata Steel and JSW Steel over the next two years to boost earnings, hence easing the impact of the new state taxes,” it added.

Both agencies said the overall impact can be assessed better once more details emerge on States’ strategies.

“We think that the impact of the court ruling will become gradually clearer in the next few quarters. A key unknown is whether individual States will raise demands for past dues or impose additional taxes. The governments will have to balance the benefits of additional tax inflows with the risk of deterring further mining investments in their State,” Fitch Ratings explained.