THE CONCEPT OF ROYALTY
Royalty is a share in production, free of the costs of production. This is a sharing arrangement created by a lease contract between the owner of mineral deposits (the lessor) and one who is given the right to go onto the lands of the lessor and explore for and develop these minerals (the lessee). In return for allowing the lessee to develop the minerals, the lessor is given a share of any minerals produced.
Royalty may also be looked at as the price paid to the lessor for the mineral extracted or consumed by the lessee. Thus, price of mineral is of two kinds:
• Price paid by the lessee to the lessor, and
• Price charged by the seller (lessee) to the consumers
The basis for arriving at the two prices is different. The price paid by the lessee to the lessor for extraction and use of the mineral is royalty. While determining the pit head price of coal, royalty and other levies are not included in the cost of production of coal. Even the transport cost, handling charges, demurrages and other expenses incurred after the dispatch of coal from the pit head are excluded from the estimation of cost for arriving at the pit head or basic price of coal. Thus, after fixing the pit head price, royalty is collected by the operator from the coal consuming entities. Royalty and other levies are taken into consideration while arriving at the final consumer price charged by the seller.
The royalty is not a tax levied by the government. Tax is a levy imposed on the entire citizens. 'Royalty' is a payment made by the lessee to the lessor based on an agreement. Royalty is also not a rent. Rent is charged for letting the premises to be used. The land does not get depleted. Royalty is charged for letting the lessee to consume the wealth belonging to the lessor. The wealth gets depleted over time.
Royalty is also not a 'profit sharing arrangement between the lessor and the lessee. Whether the lessee has profit or loss - royalty has to be paid to the lessor. It is also not a profit sharing because while calculating royalty, the cost is not passed on to the lessor.
Mineral royalty is payable on market price or on market value (determined at the pit head). The price or value is determined at the time mineral is physically severed from the ground and used or marketed. In almost all countries, the issue of 'royalty' is riddled with hurdles and complexity. There are always some sort of disputes between the lessor and the lessee over how the royalties are calculated and paid. The issues, which generally crop up, are:
• The basis of calculating royalty payment or the method of determining the value of the produced mineral (i.e., should royalty be based on the proceeds of sale of the mineral, or on the intrinsic value of the product etc.);
• The point of valuation of the product (i.e., at the dispatch point, at the pit head, etc.); and
• The quality or condition of the product (i.e., in raw state at the mouth of the well (pit head) or if not marketable at the pit, after placed in a marketable condition).
COAL PRICING IN INDIA
Government of India deregulated the prices of Non-Coking Coal of grades A, B & C, Coking coal and Semi/Weakly coking coal on March 22, 1996. Prior to this government was fixing the coal prices at will looking into the cost factor and inflationary pressure on the country. Subsequently, on February 12, 1997, Government of India deregulated the prices of non-coking coal of grade D, Hard Coke and Soft Coke and also allowed Coal India Ltd. to fix coal prices for grades E, F & G till January 2000 once in every six months by updating cost indices as per escalation formula contained in the 1987 report of the Bureau ofIndustrial Cost & Prices. With effect from January 01, 2000, CIL was free to fix the prices of such grades
of coal in relation to the market prices. Pursuant of the above, CIL fixed the prices of deregulated coal
from time to time and last such revision has been made on December 12, 2007. Grade wise Basic Price
of coal at the Pit-head excluding statutory levies for Run-of-mine (ROM) Non-Long-Flame Coal ,Long
flame Coal, Coking Coal, Semi Coking Coal& Weakly Coking Coal ,direct feed Coal, Assam Coal
for various subsidiaries of CIL (as in 2007) are given in Figure 1:
Figure 1: Coal price w.e.f December 2007
It is widely believed that an increase in the rates of royalty leads to substantial increase in the landed price of coal. It is worth mentioning here that there are two prices of coal. One Pit head price or basic price and the second the final landed price. Pit head Value of coal is the value of coal at pit head (of the collieries). It is computed on the basis of basic price - thus it does not involve any cost of sizing, transportation from pit head, loading, Cess, Royalty, Sales tax, Stowing Excise Duty etc. This is followed for all non-captive coal companies viz., CIL subsidiaries, SCCL, BSMDCL and JKML.
The landed price is basic price plus all levies, royalty, transport cost and other costs. In fact, the price of coal depends not only on royalty but also on various other factors, which affect the final price of coal more strongly. This makes coal companies less competitive and also puts lot of burden on the coal consuming industries.
The impact of increase in price either due to revision of pit head (Basic) price of coal or due to increase in the landed price of coal should have similar economic impact on the performance of the coal consuming industries. This should also affect the demand for coal in the similar manner. However, it is not clear, why the same view is not taken when the landed price of coal increases due to increase in the basic coal price (pit head price) or due to increase in the railway freight charges or other levies imposed both by the Centre and the States. The coal producing states rightly feel that the coal prices are frequently increased to benefit the companies and the Central Government. Centre also earns through coal freight.
Most of the coal companies are Central Government undertakings. The Centre gets dividend from these public sector undertakings. Any increase in profit of these companies is directly beneficial to the Central Government. It is argued by non centralists that if the government is interested in lowering the price of coal, Centre can adjust the coal freight and or fix lower pit head prices of coal, while allowing the States to get more through royalty.
While the price of coal has been revised almost every year (some time more than once in a year) and the revision was also quite steep. The Ministry of Coal felt "in India, unit value of coal in terms of per kilo calorie of useful heat value has been increasing more rapidly than being exhibited by simple unit value comparison over the years.
ROYALTY ISSUES IN INDIA
The Mines and Mineral Development Sector is under the concurrent control of the Central and the State governments. Entry 54 in the Union List and entries 23 and 50 in the State List have stipulated that both Central and State governments are competent to regulate mines and mineral development in the public interest.
The MMDR act 1957 empowers the central government to govern and fix the royalty rates in India. Royalty revenues go directly to the state’s account. In India, there are three players to the royalty structure:
• The central government
• The state government
• The coal mine lease holder
The central government fixes the royalty rate, mode and the frequency of revision of royalty rates. The state government collects and appropriates the royalty revenue and the mine lease holder who pays the royalty as fixed by the government.
Based on the recommendations of the Sarkaria Commission, in the Standing Committee of Inter State Council, a consensus was reached that the Central Government should endeavor to revise the royalty rates every three years, with a programme to progressively shift towards an ad-valorem regime. The 11th and the 12th Finance Commissions had also recommended for timely revision of royalty rates.
Low royalty rates and their infrequent revision has become an important irritant in the realm of Centre- State financial relations. While the Centre is under no compulsion to periodically revise royalty rates, the States on the other, plea for an upward revision of the rates on the ground that they lose heavily if rates are not commensurate with the revision in the administered prices of Coal and Lignite.
To be continued>>>>>>>>>>
Royalty is a share in production, free of the costs of production. This is a sharing arrangement created by a lease contract between the owner of mineral deposits (the lessor) and one who is given the right to go onto the lands of the lessor and explore for and develop these minerals (the lessee). In return for allowing the lessee to develop the minerals, the lessor is given a share of any minerals produced.
Royalty may also be looked at as the price paid to the lessor for the mineral extracted or consumed by the lessee. Thus, price of mineral is of two kinds:
• Price paid by the lessee to the lessor, and
• Price charged by the seller (lessee) to the consumers
The basis for arriving at the two prices is different. The price paid by the lessee to the lessor for extraction and use of the mineral is royalty. While determining the pit head price of coal, royalty and other levies are not included in the cost of production of coal. Even the transport cost, handling charges, demurrages and other expenses incurred after the dispatch of coal from the pit head are excluded from the estimation of cost for arriving at the pit head or basic price of coal. Thus, after fixing the pit head price, royalty is collected by the operator from the coal consuming entities. Royalty and other levies are taken into consideration while arriving at the final consumer price charged by the seller.
The royalty is not a tax levied by the government. Tax is a levy imposed on the entire citizens. 'Royalty' is a payment made by the lessee to the lessor based on an agreement. Royalty is also not a rent. Rent is charged for letting the premises to be used. The land does not get depleted. Royalty is charged for letting the lessee to consume the wealth belonging to the lessor. The wealth gets depleted over time.
Royalty is also not a 'profit sharing arrangement between the lessor and the lessee. Whether the lessee has profit or loss - royalty has to be paid to the lessor. It is also not a profit sharing because while calculating royalty, the cost is not passed on to the lessor.
Mineral royalty is payable on market price or on market value (determined at the pit head). The price or value is determined at the time mineral is physically severed from the ground and used or marketed. In almost all countries, the issue of 'royalty' is riddled with hurdles and complexity. There are always some sort of disputes between the lessor and the lessee over how the royalties are calculated and paid. The issues, which generally crop up, are:
• The basis of calculating royalty payment or the method of determining the value of the produced mineral (i.e., should royalty be based on the proceeds of sale of the mineral, or on the intrinsic value of the product etc.);
• The point of valuation of the product (i.e., at the dispatch point, at the pit head, etc.); and
• The quality or condition of the product (i.e., in raw state at the mouth of the well (pit head) or if not marketable at the pit, after placed in a marketable condition).
COAL PRICING IN INDIA
Government of India deregulated the prices of Non-Coking Coal of grades A, B & C, Coking coal and Semi/Weakly coking coal on March 22, 1996. Prior to this government was fixing the coal prices at will looking into the cost factor and inflationary pressure on the country. Subsequently, on February 12, 1997, Government of India deregulated the prices of non-coking coal of grade D, Hard Coke and Soft Coke and also allowed Coal India Ltd. to fix coal prices for grades E, F & G till January 2000 once in every six months by updating cost indices as per escalation formula contained in the 1987 report of the Bureau ofIndustrial Cost & Prices. With effect from January 01, 2000, CIL was free to fix the prices of such grades
of coal in relation to the market prices. Pursuant of the above, CIL fixed the prices of deregulated coal
from time to time and last such revision has been made on December 12, 2007. Grade wise Basic Price
of coal at the Pit-head excluding statutory levies for Run-of-mine (ROM) Non-Long-Flame Coal ,Long
flame Coal, Coking Coal, Semi Coking Coal& Weakly Coking Coal ,direct feed Coal, Assam Coal
for various subsidiaries of CIL (as in 2007) are given in Figure 1:
Figure 1: Coal price w.e.f December 2007
It is widely believed that an increase in the rates of royalty leads to substantial increase in the landed price of coal. It is worth mentioning here that there are two prices of coal. One Pit head price or basic price and the second the final landed price. Pit head Value of coal is the value of coal at pit head (of the collieries). It is computed on the basis of basic price - thus it does not involve any cost of sizing, transportation from pit head, loading, Cess, Royalty, Sales tax, Stowing Excise Duty etc. This is followed for all non-captive coal companies viz., CIL subsidiaries, SCCL, BSMDCL and JKML.
The landed price is basic price plus all levies, royalty, transport cost and other costs. In fact, the price of coal depends not only on royalty but also on various other factors, which affect the final price of coal more strongly. This makes coal companies less competitive and also puts lot of burden on the coal consuming industries.
The impact of increase in price either due to revision of pit head (Basic) price of coal or due to increase in the landed price of coal should have similar economic impact on the performance of the coal consuming industries. This should also affect the demand for coal in the similar manner. However, it is not clear, why the same view is not taken when the landed price of coal increases due to increase in the basic coal price (pit head price) or due to increase in the railway freight charges or other levies imposed both by the Centre and the States. The coal producing states rightly feel that the coal prices are frequently increased to benefit the companies and the Central Government. Centre also earns through coal freight.
Most of the coal companies are Central Government undertakings. The Centre gets dividend from these public sector undertakings. Any increase in profit of these companies is directly beneficial to the Central Government. It is argued by non centralists that if the government is interested in lowering the price of coal, Centre can adjust the coal freight and or fix lower pit head prices of coal, while allowing the States to get more through royalty.
While the price of coal has been revised almost every year (some time more than once in a year) and the revision was also quite steep. The Ministry of Coal felt "in India, unit value of coal in terms of per kilo calorie of useful heat value has been increasing more rapidly than being exhibited by simple unit value comparison over the years.
ROYALTY ISSUES IN INDIA
The Mines and Mineral Development Sector is under the concurrent control of the Central and the State governments. Entry 54 in the Union List and entries 23 and 50 in the State List have stipulated that both Central and State governments are competent to regulate mines and mineral development in the public interest.
The MMDR act 1957 empowers the central government to govern and fix the royalty rates in India. Royalty revenues go directly to the state’s account. In India, there are three players to the royalty structure:
• The central government
• The state government
• The coal mine lease holder
The central government fixes the royalty rate, mode and the frequency of revision of royalty rates. The state government collects and appropriates the royalty revenue and the mine lease holder who pays the royalty as fixed by the government.
Based on the recommendations of the Sarkaria Commission, in the Standing Committee of Inter State Council, a consensus was reached that the Central Government should endeavor to revise the royalty rates every three years, with a programme to progressively shift towards an ad-valorem regime. The 11th and the 12th Finance Commissions had also recommended for timely revision of royalty rates.
Low royalty rates and their infrequent revision has become an important irritant in the realm of Centre- State financial relations. While the Centre is under no compulsion to periodically revise royalty rates, the States on the other, plea for an upward revision of the rates on the ground that they lose heavily if rates are not commensurate with the revision in the administered prices of Coal and Lignite.
To be continued>>>>>>>>>>
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