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 India plans to tweak a formula to fix the average domestic sale price of iron ore, a key steelmaking raw material, according to a government note reviewed by Reuters and a source with direct knowledge of the matter.

    After the Ministry of Mines pointed out that some iron ore miners tried to keep the average sale price artificially lower to pay lower royalties to the government, the federal government formed a panel to work out an "alternative mechanism" to determine domestic iron ore prices.

    "Any reduction in the ASP (average sale price) of iron ore through unscrupulous means will impact the revenue accruing to the government on account of auction premium, royalty," the government note said.

    The government currently levies a uniform 15% royalty.

    The government-appointed panel met last week, the source said, adding that it is specifically examining the current pricing mechanism adopted by iron ore producers of Odisha, Karnataka, Jharkhand and Chhattisgarh - the states that are India's biggest iron ore producers.

    The panel would work out a formula that would narrow the prevailing price gap among top-producing states, said the source, who is directly involved in the process but asked to remain anonymous because the deliberations are not public.

    Iron ore prices vary depending on the iron content. But the government-appointed panel believes that even prices of the same grade of ore differ widely, creating an anomaly and making it easier for miners to lower rates artificially to avoid higher royalty payments to the government, the source said.

    "Miners self-declare prices, and on that basis the weighted average price is calculated and we derive the average sale price. But we are seeing variance in these prices on the same grade of ore," the source said.

    The federal Ministry of Mines did not respond to an e-mail seeking comment.

    India is the world's fourth-biggest iron ore producer and a major exporter of the ore to China.