New Delhi: With a view to make investments in exploration companies more attractive and to help private exploration companies gain investors, Assocham has proposed introduction of a ‘flow-through-shares’ instrument which allows transfer of tax deductions from exploration companies to individual investors.
The instrument currently being used in Canada has been recommended to improve the fiscal regime for exploration through a tax regime that would allow flexibility in expenses deduction while attracting international investors.
There is a restriction of four years upto which the company can carry forward its exploration expenses and, therefore, needs to be urgently expanded to enable the company deduct these expenses after the commencement of mining operations.
The ‘flow-through share’ scheme recommended by the Chamber allows transfer of tax deductions from exploration companies to individual investors.
Exploration companies accumulate losses as they fund continued exploration and these accumulated losses are reflected on their balance sheets until they can be offset against future revenues.
However, given the significant time lag between commencement of exploration and discovery of mineral deposits, investors in such exploration companies must wait a long time before they can expect any return on investment. This is a significant disincentive to invest in such companies.
Allowing the transfer of tax deductions of exploration companies to individual investors will enable losses to be transferred to individual investors as and when they accumulate. These investors can then offset them against their other income. This makes investment in exploration companies more attractive and easier.
Canada also offers an ‘uplift’ provision to mining companies. This refers to the ability of mining companies to augment the deductible exploration and development expenses by a certain percentage (the ‘uplift’). They can deduct more than they spend and the amount of ‘uplift’ is as high as 50% in one province.
In addition to geological risk, mining companies also face uncertainties relating to cost and market prices for their minerals. This makes them selective in deciding where they invest. The long time scale of mining projects adds to the requirements for mining companies to evaluate their risks carefully.