Essar Group is seeking a refund of 4000 crore capital gains tax deducted 6 years ago when it sold stake in telecom venture to Vodafone Plc of the UK. The group's Mauritius unit, Essar Communications in July 2011 had sold 22 percent in Vodafone Essar for USD 4.2 billion. Vodafone, however, paid Essar USD 3.32 billion after withholding USD 0.88 billion (around 4000 crore) as tax deducted at source (TDS). It deposited that money with the income tax department as tax on long-term capital gains made by Essar.

Essar Communications has moved the Authority for Advanced Rulings (AAR) seeking a refund of the tax deposited by Vodafone as it believes that no tax was due on the transfer under the India-Mauritius treaty. The tax department is, however, contesting the claim of Essar Communications, saying the deal was structured in a way so as to misuse the provision of the treaty. The application was filed by Essar Mauritius Companies in September 2012 before AAR and the same was admitted in July 2015. There have been multiple hearings in 2016-17. The capital gains resulting from sale of VEL (Vodafone Essar Ltd.) shares are not subject to tax in India in view of Article 13(4) of the India-Mauritius tax treaty and in light of settled judicial position established by catena of judicial pronouncements made by the Supreme Court of India, high courts and AAR, and has also been confirmed on several occasions by the Government of India.

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