By, Shivanand Pandit
The government of India has chosen to file an appeal against the $1.4 billion international arbitration award won by Cairn Energy in a retrospective tax demand lawsuit, even as the matter did not figure in the course of two days of discussions the finance secretary held with the official of the company to look for a solution. According to the government sources, the Indian government will also consider challenging previous suits filed at several global courts by Cairn Energy. Although the government has greeted the company’s action to reach out for a resolution, it is of the opinion that any disagreement solution to be chased by Cairn will have to be inside the prevailing laws.
A few days before, the Chief Executive Officer of Cairn Energy Simon Thomson met Finance Secretary of India Ajay Bhushan Pandey to discuss the way forward with respect to the $1.4 billion or around Rs 10,300 crore arbitration award by the Permanent Court of Arbitration (PCA) at The Hague in December 2020. The court had pronounced that the Indian government’s retrospective tax claim on Cairn Energy was in violation of the assurance of fair and impartial treatment and in contradiction of the India-UK mutual agreement. While the CEO of Cairn said before the meeting that shareholders of the company wanted a rapid resolution, the government of India has mentioned that the only thinkable solution for both parties to escape more litigation was for Cairn Energy to agree to the government’s Vivad se Vishwas tax amnesty and dispute resolution system.
Resultant of a Bad Decision
The tax claim against Cairn Energy Plc dates back to the era of the financial year 2006-2007. In that financial year as a part of internal reorganization, Cairn UK transferred shares of Cairn India Holdings to Cairn India. The Income Tax officials asserted that Cairn UK had made Capital Gains and spanked it with a Rs 24,500 crore tax demand. Due to diverse clarifications of capital gains, the company declined to pay, which provoked cases in the Income Tax Appellate Tribunal (ITAT) and the High Court. Cairn lost the case at ITAT and a case on the valuation of capital gains remains undecided before the Delhi High Court.
In the years 2009 and 2011, Cairn sold its share to Petronas and Vedanta and paid around Rs3,700 crore of capital gains taxes on these dealings. After, similar transactions which transpired in the year 2006 were scrutinized once again. However, no ultimatum was made for taxes in the said year. Tax officials have chosen to chase Cairn only after the retrospective tax law was announced in 2012.
Retrospective taxation permits a nation to pass a regulation on taxing certain products, items, services, transactions, and charge companies from a time earlier the time on which the law is approved. In 2012, the government lost its case against Vodafone Plc at the Apex Court, and then the Finance Minister Pranab Mukherjee passed an amendment in income tax legislation making the tax liability retrospective which gave the Income-tax department to retrospectively tax such dealings. The Act was approved by Parliament that year and the burden of paying the tax fell back on Vodafone and a similar provision of the tax was employed to charge Cairn Energy Plc’s transmission of shares as well.
In 2015 Cairn began international arbitration procedures against the Government of India under the UK India Bilateral Investment Treaty. The arbitration planned to decide if India ruptured its responsibilities under the Treaty to protect Cairn’s investments in India by retrospectively relating a newly passed capital gains tax law to an internal corporate restructuring commenced in 2006.
According to Cairn, it is looking for complete compensation for losses resulting from the expropriation of its investments in India in the year 2014, constant tries to implement retrospective tax decrees, and the failure to treat the company and its investments justly. Cairn also mentioned that it has lawful guidance authorizing that the maximum amount that could eventually be recovered by the department is limited to the value of Cairn UK Holdings Limited’s assets, mainly the ordinary and preference shares, almost all of which have previously been vended and/or cashed, plus the detained dividends and tax refunds from 2009 and 2011. And the climax is the arbitration panel pronounced that tax claim against the Cairn is inconsistent with UK-India bilateral treaty and the plaintiffs are discharged from any obligation to pay it. It has also instructed the respondent, the government of India to defuse the enduring effect of the demand by eternally thinning the demand.
In 2012, the government lost its case against Vodafone Plc at the Apex Court and then the Finance Minister Pranab Mukherjee passed an amendment in income tax legislation making the tax liability retrospective which gave the Income tax department to retrospectively tax such dealings.
Certainly not a Sensible Move
The government of India’s move in the litigation looks less like a government in control of the fight and more like bureaucrats waving about and attempting everything in sight. Therefore, the only sensible action for the government is to march ahead from the retrospective ax demands totally. Earlier the government has lost its arbitration against Vodafone and the company succeeded in an international arbitration war against India’s Rs 22,100 crore retrospective tax demands. In September 2020 the Permanent Court of Arbitration at the Hague had ruled that the Indian government’s retrospective tax demand against telecom major Vodafone was in violation of the guarantee of fair and equitable treatment under the mutual investment protection agreement between India and the Netherlands. However, the government has appealed the ruling, and now it plans to do the same with the Cairn decision. This would definitely be a big blunder.
It is clear that whether against Vodafone or Cairn, the cost in terms of time and spoiled investment ambiance for the nation is much above than any rewards to the exchequer. The government’s intention of imposing the sovereign right to tax will create tremendous confusion or misperception and adversely affect the investment atmosphere. Cairn is accountable for one of the major power source discoveries in the recent history of India. Tax matters have badly jammed Cairn’s insight of India as an investment destination the same way that they have likely put paid hopes of any additional investment in the Indian telecom infrastructure from Vodafone. For a nation famished with private investment in infrastructure, this is self-defeating policymaking.
Retrospective Taxation Akin to Tax Terrorism
The government should not throw good money after the bad in order to be in harmony with the reformist focus of the government, as stylishly abridged by the PM in Parliament recently. It should completely stop chasing business firms that invested in India in such a manner that they remorse their choice. Retrospective tax demands may be the country’s autonomous privilege, but there is no question that they demolish policy steadiness and cause worries to build up amongst investors. Chasing such claims through forum and tribunal shopping as the government is presently doing brands all talk of ease of doing business sound worthless.
Retrospective tax demands may be country’s autonomous privilege, but there is no question that they demolish policy steadiness and cause worries to build up amongst investors. Chasing such claims through forum and tribunal shopping as the government is presently doing brands all talk of ease of doing business sound worthless.
Six years ago in 2014 while publicizing its election manifesto or strategy, the BJP had criticized the Congress-led UPA government for promoting “tax terrorism” and “uncertainty” in the nation. It also stated that Congress’s strategy not only negatively influenced the investment climate in India but also damaged the image of the country. However, the present situation gestures that rather than introducing a non-argumentative and advantageous tax environment, the Modi government is moving ahead with the extremely combative policies of the UPA government.
Former finance minister, Arun Jaitely equated retrospective taxation provisions to tax terrorism, and paradoxically, the Court order of Cairn’s case took note of this and other disagreements made by BJP leaders on retrospective amendments and international disputes. Therefore, the government should comply with the verdict to bury the legacy instead of inventing ways to overrule judgments. The government must distance itself from the topic of retrospective taxation that has instigated tremendous impairment to India’s goodwill.
The NDA government would have scrapped the remorseful provisions of the Income-tax in its first Budget itself. But it was busy in blaming the Nehru legacy and pointing irrelevant matters. By losing the arbitrations in the most-observed cases under a bothersome law the government allowed a stimulating opportunity to let go and scored a self-goal. This has surely upset the investment’s trustworthiness. Consequently, the government’s ambitions to rope in worldwide investments must be harmonized by guaranteeing strategy stability ad generating a power-packed governing structure.
Shivanand Pandit is a Goa-based tax specialist, financial adviser, and guest faculty.