Essar Oil's Rs 8,000 cr tax bill sends share sliding

Essar Oil today slumped over 3 percent in morning trades after the Gujarat High Court rejected the oil major’s plea for relief in the repayment of over Rs 8,000 crore due as sales tax deferment liability. The court directed the state government to expedite the recovery.

Essar Oil fell 3.18 percent to Rs 53.35 while the BSE Sensex was down 14.34 points to 16,867.82. After the ruling, the Gujarat government asked Essar Oil to repay Rs 6,300 crore ($1.2 billion) in sales tax plus interest accrued. The Supreme Court dismissed Essar’s review petition earlier this year.

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Essar Oil had sought relief to pay the tax dues of Rs 6,414 crore in eight yearly instalments. It also wanted exemption from paying penalty and interest of Rs 2,000 crore on it.

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But, the court came down heavily on the company. “The petitioner should have acted as a good company and furnished the amount to the government and not defrauded the state for its commercial benefit,” the bench observed.

Essar Oil said it is yet to receive the copy of the Gujarat High Court order, but once this is received, the company plans to take appropriate actions, including appealing the decision before the Supreme Court of India.

A Citi report earlier pointed out that a full-repayment ruling requires funding, most likely through the debt market, although equity cannot be ruled out. “Given the risks of a considerable financial burden emerging for the company, we view a potentially lengthy sales tax dispute as a crucial limiting factor to the company’s ability to invest in long-term growth and return cash to shareholders,” the report said.

Essar Oil said that the company is in advanced discussions with Indian lenders with regard to putting in place a Rs 5,000 crore loan facility as a contingency measure for use in the event that the sales tax liability becomes payable immediately or that the company is not able to negotiate a satisfactory repayment schedule. The company said it expects this facility to be finalised shortly.

Earlier this year the Supreme Court had upheld the Gujarat government’s appeal against the company’s tax benefit claims. Subsequently, tax authorities of Gujarat Government had issued a demand notice to Essar for repayment of sales tax deferment benefits utilised by the company. The state government had put the company’s tax dues at Rs 8,414 crore, which included interest and penalty.

This costly legal battle coupled with foreign exchange losses has plunged Essar Energy, the Indian oil and power generation group which is Essar Oil’s parent company, into a $1.14billion pre-tax loss in the 15 months to end-March, and sent the shares sliding again.

The London-listed company is in advanced talks with banks for a $1-billion loan to meet its sales tax liability of $1.2 billion to the Gujarat government. Moreover, delays by the government in granting the necessary permits to develop low-cost coal mines have dampened medium-term earnings growth potential for the company and reduced its ability to move ahead with longer-term investment plans