By Shivanand Pandit
The government has filed an appeal against the $1.4 billion international arbitration award, which includes interest, won by British oil and gas exploration company Cairn Energy in a retrospective tax demand lawsuit. This was after two days of discussions with the finance secretary by the company led to no resolution.
According to government sources, the centre will also consider challenging previous suits filed in several courts globally by Cairn Energy. Although the government has accepted a move by the company to reach a resolution, it is of the opinion that any disagreement solution to be chased by Cairn will have to be inside prevailing laws in India.
Recently, the CEO of Cairn Energy, Simon Thomson, met Finance Secretary Ajay Bhushan Pandey to discuss the way forward with respect to the $1.4 billion (Rs 10,300 crore) arbitration award given by the Permanent Court of Arbitration 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 agreement.
While the CEO of Cairn said before the meeting that shareholders of the company want a rapid resolution, the government said that the only thinkable solution for both parties to escape more litigation was for Cairn to agree to the government’s Vivad se Vishwas tax amnesty and dispute resolution system.
The tax claim against Cairn Energy plc dates back to 2006-07. That year, as part of internal reorganisation, Cairn UK transferred shares of Cairn India Holdings to Cairn India. Income tax officials asserted that Cairn UK had made capital gains and slapped it with a Rs 24,500-crore tax demand. Due to diverse clarifications of capital gains, the company declined to pay. This provoked cases in the Income Tax Appellate Tribunal (ITAT) and the Delhi High Court. Cairn lost the case at ITAT and a case on the valuation of capital gains remains undecided before the High Court.
In 2009 and 2011, Cairn sold its share to Petronas and Vedanta and paid around Rs 3,700 crore of capital gains taxes on these dealings. Similar transactions which transpired in 2006 were scrutinised once again. However, no ultimatum was set for taxes in the said year. Tax officials chose 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 and transactions and charge companies even before the law is approved. In 2012, the government lost its case against Vodafone plc in the apex court and the then Finance Minister Pranab Mukherjee passed an amendment in income tax legislation making the tax liability retrospective. This allowed the income tax department to retrospectively tax such dealings. The Act was approved by Parliament that year and the burden of paying tax fell back on Vodafone. The same tax provision 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 had reneged on 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 in 2006.
According to Cairn, it is looking for complete compensation for losses resulting from the following issues expropriation of its investments in India in 2014, constant attempts to implement retrospective tax decrees and the failure to treat the company and its investments justly. Cairn also mentioned that it had lawful guidance authorising that the maximum amount that could eventually be recovered by the department is limited to the value of Cairn UK Holdings Limited’s assets. This is mainly ordinary and preference shares, almost all of which have previously been vended and/or cashed, plus detained dividends and tax refunds from 2009 and 2011. And the climax was that the arbitration panel pronounced that tax claim against Cairn was inconsistent with the UK-India bilateral treaty and the plaintiffs were discharged from any obligation to pay it. It also instructed the respondent, the Government of India, to diffuse the effect of the demand by thinning it.
The government’s move in the litigation gives the impression that it is not in control of the fight. Therefore, the only sensible action for it is to abolish the retrospective tax demand.
Earlier, the government lost its arbitration against Vodafone and the company succeeded in an international arbitration fight against India’s Rs 22,100 crore retrospective tax demand. In September 2020, the Permanent Court of Arbitration at The Hague ruled that the Indian government’s retrospective tax demand against 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 be a big blunder.
It is clear that whether it is Vodafone or Cairn, the cost in terms of time and investment for the nation is more than any reward that can accrue 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 climate. Cairn, after all, is one of the major power sources discovered in recent history. Tax matters have badly affected Cairn’s perception of India as an investment destination. Similarly, any hopes of Vodafone putting in additional investment in India’s telecom infrastructure have been put paid due to the case. For a nation looking for private investment in infrastructure, this is self-defeating policymaking.
The government should not throw good money after bad in order to be in harmony with the reformist focus of the government. It should stop chasing business firms that invest in India in such a manner that they end up regretting their decision. Retrospective tax demands may be a country’s autonomous privilege, but there is no question that they demolish policy steadiness and cause worry among investors. Chasing such claims through forum and tribunal shopping as the government is currently doing leads to questions about India’s ease of doing business.
In 2014, while publicising its election manifesto, the BJP had criticised the Congress-led UPA government for promoting “tax terrorism” and “uncertainty” in the nation. It also stated that the Congress’s strategy not only negatively influenced the investment climate of India but damaged its image. However, the present cases show that instead of introducing a non-argumentative and advantageous tax environment, the Modi government is moving ahead with the same combative policies of the UPA government.
Former finance minister Arun Jaitley had equated retrospective taxation provisions with tax terrorism and, paradoxically, the Court order in 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. It must distance itself from retrospective taxation as it affects India’s goodwill abroad.
By losing arbitrations in some of the most-observed cases under a bothersome law, the government allowed a stimulating opportunity to go and scored a self-goal. This has affected investment trustworthiness. Consequently, the government’s ambitions to rope in worldwide investments must be harmonised by guaranteeing strategy stability and generating a power-packed governing structure.
—The writer is a financial and tax specialist, author and public speaker based in Margao, Goa