India’s mining behemoths are bracing for a significant profit squeeze after the Supreme Court has allowed states to impose retrospective taxes on mining activities.

The ruling is expected to erode profit margins and cash flows, potentially impacting credit ratings of companies such as Tata Steel, JSW Steel and Vedanta Resources, rating agency Moody’s Investors Services said.

The ability of the companies to pass on increased costs to consumers is uncertain, exacerbating the financial strain.

Moody’s Investors Service said it will closely monitor the situation and may downgrade credit ratings if the financial impact is severe.

The rating agency will assess each company’s total retrospective tax liabilities and ongoing tax burdens.

“We will evaluate the implications for our rated companies when there is more clarity on their total retrospective tax payments and the prospective state taxes they will have to pay for their mining activities,” Moody’s said.

“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."

The retrospective taxes are credit negative for companies with mining operations in India such as Tata Steel Ltd (Baa3 stable rating), UltraTech Cement Limited (Baa3 stable), JSW Steel Limited (Ba1 stable) and Vedanta Resources Limited (Caa3 negative) because the instalment payments will dent their cash flows.

At the same time, these companies will have to pay state taxes that will hurt their profitability.

While the companies’ retrospective taxes could be significant, the effect on their cash flows will be eased because the owed taxes will be paid in instalments over 12 years beginning April 1, 2026.

The new taxes could prompt them to recalibrate their capex plans.