Australian Mine tax – How it can affect strategy of Indian companies ?

Australia- once regarded as a territory out of bounds is today the heartthrob of Indian infrastructure and mining companies as it provides an invaluable bounty of natural resources along with transparent government regulations and culture. Indian companies like Adani Group, NMDC, Lanco Infratech and GVK have already set a footmark on the continent through acquiring mines and others like Tata Steel, Aditya Birla Group, Vedanta, JSW Steel and ICVL are looking to set up base. The total investments poured in by Indian companies in the mining sector in Australia is nearly 10 billion USD and going by the sentiment it was expected to grow, however imposition of  MRRT has now resulted in creation of doubt in the plans of expansion of the Indian companies.

MRRT or Mineral Resource Rent Tax- 22.5% tax on profits of extractive industries- has been imposed by Australian Premier Julia Gillard and is expected to come into effect from June this year. This tax has suddenly upset the plans of these companies which had zeroed in on Australia in comparison to Africa and countries like Indonesia, which has become increasingly protective about its natural resources.

Australia is generally viewed in as an extremely investor friendly and export oriented economy. Even Chinese state owned entities have invested huge amounts in Australian mines so if the Indian companies decide to move out or scale down to this tax, the Chinese will definitely move in. The Indian coal reserves are declining at a constant rate and Australian Coal mines provides a great opportunity for these companies as they export coal to India at a much lower rate than domestic coal extracted in India. The Indian government has imposed a tax of 26% on the profits of miners and the imposition of MRRT will bring the price of domestic and imported coal to almost the same level. But the bigger question is does India have any alternate to looking for Coal overseas? Probably not. If it is not Australia, then India has to look elsewhere to supply its growing energy needs.

The Australian mining industry is a cash-cow for the government as it is expected to generate 8.8% of GDP ( around 224.9 billion USD) in the year 2011-12 and has 2500 firms in this sector employing nearly 250,000 people. The new tax regime may lead to closure of many firms and at the same point of time provides an opportunity for larger firms to consolidate.  The Australian mining industry is a mixed bag in reality: Its positives include absence of red tape protocol, skilled workforce and low risk of political stability whereas its negatives include shortage of labour and strong unions, most of the infrastructure needs to be built by the acquiring companies and also the new tax ( MRRT ). However what remains to be seen is whether the Indian companies continue to invest in mining sector in Australia or decide to hunt for better grounds owing to the extraction tax- though it is almost certain that overseas coal imports is the need of the hour for India.