Essar Oil would have to quickly deposit sales tax of Rs 6,300 crore to the Gujarat government, as the Supreme Court has rejected the company's contention that it was entitled to make deferred payment of tax on sales from its Vadinar refinery in the state.

The Gujarat government had argued that Essar's refinery would have been eligible to defer sales tax payment by 17 years, as an incentive to develop backward areas, only if the plant had been commissioned by August 15, 2003. It was commissioned only in late 2006.

The company had argued that it had no control on factors that delayed the project - a severe cyclone that ravaged the coastal region and a stay order secured by a non-governmental organisation. The company approached the high court, which upheld its plea but the state government successfully challenged the verdict in the Supreme Court.

Essar said the verdict would only change the schedule of tax payment, not the total tax liability. "It needs to be clarified that the scheme was not for sales tax exemption in toto but was only for a deferment of payment of sales tax. In view of the judgement, the payment of tax which was to be made in deferred installments, may face some changes in the timeline," it said in a late-evening statement.

In a statement to stock exchange, Essar Oil said: "Today, the Hon'ble Supreme Court has set aside the judgment of the Gujarat High Court by which Essar Oil was entitled to avail of Sales Tax Deferment Scheme i.e. to pay sales tax to the Gujarat state government in deferred installments. The company has availed of approximately Rs 6,300 crore of sales tax benefit as of December 2011 which was to be paid in deferred installments."

Essar said it would be able to provide more information after studying the Supreme Court order. Shares of Essar Oil dropped nearly 8% to 58.10 on Tuesday.

Since 2002, Essar has urged the state government that since the refinery was delayed by factors beyond its control, the Gujarat government should extend the deadline to become eligible for tax deferment for 17 years.

"According to Essar, commercial production was delayed because of the actions of the state government and certain orders passed by the honourable high court which was later set aside by the Supreme Court, and therefore it was entitled to an extended date of commercial production," the company said.

Vadinar Refinery has capacity 14 mtpa of crude refining capacity, which is expected to increase to 20 mtpa by September 2012. On Monday, Essar Oil announced the commissioning of hydrogen manufacturing unit, one of the nine units to be commissioned at an investment of 8,310 crore to enhance the refinery complexity to 11.8, up from 6.1 at present. (Economic Times)