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Ruling leaves Essar Oil facing Rs 6,300-cr sales tax liability
January, 18th 2012

Essar Oil is in effect facing a sales tax liability of about Rs 6,300 crore following an adverse Supreme Court order on Tuesday.

The Supreme Court set aside the judgment of the Gujarat High Court by which Essar Oil was entitled to avail itself of Sales Tax Deferment Scheme to pay sales tax to the State Government in deferred instalments, the company informed the Bombay Stock Exchange. The company has availed itself of approximately Rs 6,300 crore of sales tax benefit as of December 2011, which was to be paid in deferred instalments.

In its statement to the Stock Exchange, Essar said the company will provide further information in the matter after studying the judgment.

According to observers, since it was a deferred payment scheme, now with this order, it remains to be seen whether Essar will have to pay immediately or later. Incidentally, the company has already paid Rs 300 crore of its sales tax liability to the State Government.


It all started in 2008. Essar Oil for its Vadinar Refinery project claimed benefits under a Capital Investment Incentive to Premier/Prestigious Unit Scheme of the State. The scheme was operational in the 1995-2000 periods. According to the scheme, the projects coming up in remote areas, if completed within the prescribed time period, could claim tax benefit up to 125 per cent of the capital investments made in the project


The company was eligible for Rs 9,100 crore (125 per cent of eligible capital investment) as sales tax incentive under the scheme.

According to the scheme, Essar was liable to complete the refinery project by August 15, 2003, to be eligible to claim this benefit. However, the company could not complete the project in time as there was a stoppage of refinery construction work for around five years on account of a severe cyclone, which hit the refinery site in June 1998, as well as a stay imposed by Gujarat High Court on a PIL filed by one NGO against some other company, which stopped construction work in all the upcoming projects in that area.

Essar's refinery project became operational only in 2006 and started commercial production in 2008. The Gujarat High Court in 2008 had accepted the company's contention and extended it the benefit of the scheme.


However, the State Government (Industry Department) which filed an appeal in the Supreme Court against the High Court order said the delay in completion of the project was because the company did not have sufficient funds and not because of any act of court' (due to court order) or act of God' (due to natural disaster). In this regard, the Government submitted as proof the letters by the company itself saying that it was facing a cash crunch.

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