Supreme Court ruling on cess to affect steel, power sectors most

The impact is expected to be prominent in the steel sector, driving up input costs across the value chain and compressing operating margins. Primary aluminium producers are expected to experience a minimal margin decline of 50-60 bps considering a cess of 5-15 per cent. In the power sector, the cost of supply for the state distribution utilities could rise by 0.6 per cent to 1.5 per cent considering a cess of Rs. 75-175 per MT, which is likely to exert similar upward pressure on retail tariffs.

The mining cess is expected to elevate input costs and compress operating margins, with secondary steel producers likely to face a more pronounced impact due to their structurally lower margins compared to primary producers. There remains a lack of clarity on whether states will apply the cess retrospectively.

After the SC ruling, there could be renewed focus on the Orissa Rural Infrastructure and Socio-Economic Development Act, 2004 (ORISED), which proposed a 15 per cent cess on iron ore and coal. Imposition of such cess could raise the landed cost of iron ore in Odisha by 11 per cent, thereby increasing crude steel input costs by Rs 1200/tonne, with a 180 bps impact on operating margins. On the other hand, Jharkhand's recent regulation imposes a minimal cess of Rs 100/tonne on iron ore and coal, which would lead to a low impact on the operating margins of steel entities, i.e. 30-40 bps.

The Supreme Court also ruled that states that have enacted laws earlier for imposition of mining cess, have the discretion to apply it retrospectively, though it will not affect transactions before April 1, 2005. If enforced, this could result in sizeable liabilities for mining companies and captive consumers. However, these payments will be spread over 12 years, starting from April 1, 2026.

The imposition of cess by the states will also raise input costs across various industries.