Indian Farmers Fertiliser Cooperative (IFFCO), a major fertiliser supplier, fears it will be forced to shut operations in Uttar Pradesh as Reliance Industries has agreed to pay under protest a disputed tax levied by the state on natural gas, and pass the burden to customers.

"From 2 crore a month, our overall payments have now increased to 21 crore, as instead of the regular 10% VAT rate we are paying the penal rate of 26%. At this rate, we will have to close down as we cannot afford this," a senior IFFCO official told ET.

The UP government had levied VAT on Reliance's gas from April 2009. RIL secured a stay order against the state levy from the high court, but subsequently when the state approached the Supreme Court the company told the apex court in January this year that it will start paying VAT from February 1, 2012, and pass on the burden to consumers.

The company still opposes the tax and will seek a full refund if it wins the case, sources close to RIL said. RIL has argued that it was already paying central state tax on the gas produced in the KG-D6 block off the Andhra Pradesh coast.

RIL supplies gas to four fertiliser companies in the state - IFFCO's Aonla and Phulpur units, Kribhco's Shahjahanpur plant, Indo Gulf Fertiliser's Jagdishpur unit and Tata Chemicals' unit at Babrala.

The IFFCO official said RIL's move was surprising as the company itself had challenged the tax. "We cannot understand RIL's about-turn on the issue and it volunteering to pay VAT especially when earlier it had filed a writ petition in the Allahabad High Court resisting the imposition of tax. We were also party to the same petition and RIL took this step without informing or consulting us," added the official.

RIL declined comment, but a source close to the company said it had not changed its position on the tax. "The company cannot go on bearing the contingent liabilities on our books as the overall outstanding amount will go on increasing, and we are only the collectors in the end.

Sellers have to make the final VAT payments. The company has written to the state that its is paying this amount under protest and will claim a full refund in case the high court rules in its favour," the source said.

"RIL could have decided on this course of action to avoid showing any contingent liability on its books," added the IFFCO official.

"This entire issue is extremely unfair as no other state customers are forced to pay both Central Sales Tax and VAT on the supply of gas. It is completely unconstitutional as it amounts to double-taxation, it is difficult to comprehend RIL's stance," another senior IFFCO executive told ET. RIL did not respond to an email sent by ET.

The Supreme Court has asked the Allahabad High Court to decide on the plea against the VAT demand made by the state government within three months. "We are hoping that the high court will rule in our favour or else we will find it very difficult to sustain ourselves," the official added.

RIL, on the other hand, had submitted in the Supreme Court that the Uttar Pradesh government's levy amounted to double taxation as it was already paying central sales tax. Indo-Gulf Fertliser refused to comment while Tata Chemical and Kribhco were unavailable for comment.