Taking a cue from Canada,Australia and the US,which have successfully used tax policy to attract investors into the risky business of mineral exploration,the government is considering introducing the facility of flow-through shares and resultant tax benefits exclusively for the exploration and mining sector. The move is expected to induce high-tech exploration firms,especially those which focus on exploration rather than mining,to work seriously on the countrys largely unknown but presumably rich deposits of base metals and diamonds. Under the proposal,an exploration firm wanting to exit by transferring its licence and data to a mining company will be entitled to issue shares equivalent in value to its expenditure to the latter. The buyer,in turn,can claim a one-time tax benefit on the full value of the shares. That is,it gets to claim the full amount invested against its income. (Transfer of licence is proposed to be allowed as part of the relevant Bill on mining policy being vetted by a group of ministers.) Flow-through shares would come in handy for investors in both exploration and mining. For the exploration firm,a profitable sale of its licence and data would become easier and for investors in the mining firm,the net cost of the buy would be a fraction of the actual value of the shares. For example,if the exploration firm issues shares worth Rs 100,and the statutory tax rate for the investor is 30 per cent,the net cost of the investment for the latter would only be Rs 70. So the proposal amounts to extending the extant tax breaks for exploration to the mining sector. S Vijay Kumar,secretary,ministry of mines,told FE,In many countries,you can set off exploration expenditure against subsequent income from mining. But it is not adequate in a situation where the company doing exploration sells the data to another company which does mining. The buyer will not be able to take advantage of the exploration expenditure as it was made by the other company. Therefore,we have to build a new incentive,and hence the concept of flow-through shares, said Kumar. He added that the details of the proposal are being finalised by the ministry of mines and these would be sent to the finance ministry for approval. Currently,there is a near-absence of exploration firms in India,especially those with the specialised technologies to hunt for rare materials like diamonds,copper,zinc,uranium,etc,which tend to occur at greater depths. As a result,Indias mining industry is largely confined to exploitation of so-called surficial (occurring on or near the earths surface) deposits of iron ore,bauxite,etc. Countries like Canada,Australia,the US,Russia,Mexico,Peru and Chile account for the bulk of the worlds exploration expenditure not only because they are minerals-rich but also due to right policies (see table). While over $2 billion was invested in Canada for mineral exploration in 2010,the corresponding figure for India was less than $2 million. At present,Indias mineral policy virtually does not allow exploration to be a standalone profitable business. The exploration licensee,even if it finds a potentially commercially recoverable deposit,will have to freshly seek a mining licence and wait for the income streams from the mining activity to gain in strength to recover the costs. While the proposed change in the policy through the Mines & Minerals (Development & Regulation) Bill would allow exploration companies to transfer (sell) the licence,the ministry of mines feels that that alone wont suffice to generate investor interest. There is a need for additional fiscal support,it reckons. Puneet Goel,a director at KPMG,said,The system of flow-through shares has been successful in many countries. But for it to work,it is important to develop the entire ecosystem for investors to actively participate. Proper regulation is also required so that the facility is not misused to save tax on the sly. Tax benefits from flow-through shares are available to investors in the Canadian exploration and mining industry. Australia has a modified system. Chile undertook a major mining reform some 10 years ago and the country is now one of the most attractive mining destinations. India probably has some of the best diamond deposits in the world. Incentives for exploration would help the country to find more diamonds. Thanks to the right policies,Canada has emerged as the second largest producer of diamonds. It was virtually nowhere just five years ago, Kumar said.
