In a major blow to the Ruias-led Essar Oil, the Supreme Court on Tuesday rejected the company’s 125 per cent sales tax deferment benefit claim on its investment in the Vadinar refinery project. The company will now have to fork out at least Rs 6,300 crore in sales tax to the Gujarat government.
A bench comprising Justice Ashok Kumar Ganguly and Justice Jagdish Singh Khehar said the company could not claim the benefit of an exemption scheme as it had not started production at its refinery in Vadinar during the qualifying period.
The news had a big impact on both Essar Oil and Essar Energy’s stocks. Over a quarter of Essar Energy’s value was wiped off after the news broke. London Stock Exchange-listed Essar Energy owns 87 per cent stake in Essar Oil, which is listed on the Indian exchanges. Essar Energy shares were trading down 27 per cent on the LSE, their lowest level since the company listed in London in 2010, knocking around £ 540 million off the company’s value.
| Key financials (in Rs crore) | ||
| FY 10-11 | FY 11-12* | |
| Sales | 47,905 | 28,336 |
| Net profit | 654 | 303 |
| Total debt | 14,547 | 21,290 |
| Cash & bank balance | 2,959 | 4,543 |
| *1st half Data compiled by BS Research Bureau Source: Capitaline | ||
The Ruia family owns 77 per cent of the company as its promoter. “We welcome the Supreme Court’s decision on our appeal against Essar Oil’s tax benefit claim. While it is too early to comment on the exact amount to be paid by the company, it would be more than Rs 6,000 crore,” state industry minister Saurabh Patel told Business Standard.
Informing the Bombay Stock Exchange later in the day, Essar Oil stated, “The Supreme Court has set aside the judgment of the Gujarat high court by which Essar Oil was entitled to avail of a sales tax deferment scheme i.e. to pay sales tax in deferred instalments. The company had availed of about Rs 6,300 crore of sales tax benefit as of December 2011, which was to be paid in deferred instalments.”
In April 2008, the Gujarat high court had allowed the company to avail itself of sales tax deferment benefit for eligible capital investment under the new capital incentive policy scheme, 1995-2000, of the Gujarat government. However, the state’s industries department challenged the order in the apex court on the ground of a delay in commencement of production at the refinery by August 15, 2003. It said production started only in 2006. Under the Capital Incentive to Premier and Prestigious Units Scheme, 1995-2000, Essar Oil was given a provisional ‘premier’ registration when it was setting up an integrated greenfield refinery with facilities to process nine million tonnes per annum of crude oil at an investment of Rs 5,500 crore.
In its argument, Essar had held a natural calamity, a cyclone that hit the region in 1998, responsible for the delay.
Under the scheme, the state had allowed sales tax deferment not beyond 17 years on projects meeting certain investment eligibility criteria, such as investment of more than Rs 1,000 crore. The state government said the sales tax accruing to the companies investing under the scheme could be paid after 17 years in six equal installments. That meant the company could retain the sales tax for 17 years and use it as its cash flow. Some big-ticket investments such as Reliance Industries’ refinery project were considered eligible under the scheme along with Essar Oil’s refinery.