The Gujarat high court on Thursday allowed Essar Oil's [Get Quote] refinery in the state to avail of the sales tax/value-added tax deferment benefit to the extent of 125 per cent of the eligible capital investment.

The benefit is to be availed of under the New Capital Incentive Policy - Capital Investment Incentive to Premier/ Prestigious Unit Scheme 1995-2000.

In the late 1990s, the Gujarat government had issued a policy allowing deferment of sales tax/VAT up to a certain amount, with the benefit capped for a period not exceeding 17 years. Projects with investment over Rs 1,000 crore (Rs 10 billion) could be eligible for the tax benefit.

A deferment benefit on sale tax means a dealer is allowed to postpone the payment of tax on purchase of raw materials sales of products for a fixed period or/and up to a specific monetary limit.

Similarly, a deferment benefit on value-added tax means payment of VAT can be deferred for the agreed number of years or up to a certain amount. Projects of Reliance Industries [Get Quote] and Essar Oil's refinery were among the eligible investments under the scheme.

Granting the sales tax/VAT benefit, the Gujarat high court order capped the deferment benefit amount for Essar Oil to  Rs 1,000 crore. The cap has been put on the ground that the state government's infrastructure development in the region may have benefited Essar Oil.  The Gujarat high court has directed the state government to issue the final eligibility certificate within a month.

The state government had earlier rejected the deferment benefit on the ground of delay in commencement of production at the project. Essar Oil had contested the decision of the state government.

Under the scheme, the deferred amount of sales tax will be recovered by the sales tax department from Essar Oil in six equal annual instalments, beginning from the financial year subsequent from the year in which Essar Oil exhausts the limit of sales tax/VAT deferment granted to it or after the expiry of the relevant period of time limit, during which the deferment is available, whichever is earlier.