Essar Oil Dealt Tax Blow By Indian Court

by Mary Swire, Tax-News.com, Hong Kong

23 January 2012

The Supreme Court in India has set aside the judgement of the Gujarat High Court which ruled in favour of Essar Oil's claim to benefits under a sales tax deferment scheme in the state of Gujarat.

Under the state incentive scheme, Essar Oil was permitted to defer sales tax payments up to a value of USD1.78bn in relation to its Vadinar Refinery project, on the condition that the refinery begin production no later than 2003. However, the refinery project was beset by delays and production did not begin until 2008.

The state government then argued that Essar Oil was no longer entitled to benefit from the tax deferral scheme, a decision which was successfully challenged by Essar in Gujarat's High Court. However, the state court's ruling was overturned by the Supreme Court on January 17, sending Essar's shares plummeting and effectively wiping over GBP500m (USD780m) off the market value of Essar Oil's London-listed parent company, Essar Energy.

In a statement issued following the Supreme Court ruling, the company said: "Essar Oil would like to clarify that the sales tax deferment benefit to Essar Oil was a loan repayable in the earlier of the year 2021/22 or on exhaustion of the full eligible amount, which the company had expected to occur in the year 2013-14, and was repayable in six equal annual installments."

It went on to add that: "The company’s estimate is that the total amount of the sales tax deferment benefit was INR9,100 crore (USD1.784bn). To date Essar Oil has utilized approximately INR6,300 crore (USD1.235bn) of this benefit under the sales tax deferment scheme. Following the Supreme Court order, any repayment schedule is expected to be discussed and finalized with the State Government of Gujarat and/or be subject to court agreement."

It remains unclear whether Essar will be able to appeal the ruling.

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