Cairn Energy CEO Simon Thomson met finance minister Arun Jaitley as well as revenue secretary Shaktikanta Das to find an amicable solution to the one-year-old tax dispute involving the company’s IPO in 2006, but went back with little other than a reiteration of the assurance that the government was not interested in a hostile tax environment.
Cairn Energy’s former subsidiary, in which it had invested $5 billion over two decades prior to its sale, today produces nearly a third of India’s crude oil production. Resolving this tax case, from that point of view, is critical for regaining the confidence of foreign investors looking for a stable and friendly tax regime in India.
The case, to which there has, strangely, been no formal tax demand for over a year now, was started last year based on the famous retrospective tax amendment by then finance minister Pranab Mukherjee. While no formal demand was raised, based on the show-cause notice, Cairn Energy’s 10% shareholding in Cairn India has been attached — as part of Cairn India’s open offer, these shares were to be bought from Cairn Energy. Cairn Energy, in turn, planned to invest this money in other ventures.
Since January 2014, the value of these shares has fallen from R6,000 crore to around R4,700 crore. With a billion dollars less to invest in its core operations, Cairn Energy’s market cap has fallen and the firm has been forced to cut its workforce sharply, by around 40% across itself and its vendors.
Since finance minister Arun Jaitley’s stand has been that he will go by the verdict of the courts — including arbitral awards — on cases filed by the taxman, ironically, the fact that Cairn Energy has not gone to court is working against it. Jaitley cannot resolve the matter without repealing the retrospective law, which he does not wish to do since that might incur the wrath of Parliament and Opposition parties; and without doing that, it is becoming difficult to resolve the tax case.
In both the Vodafone and Shell transfer pricing cases, when the Bombay High Court ruled against the taxman, the government decided not to appeal them.
The Cairn Energy case does not pertain to the sale of its Indian subsidiary to Anil Agarwal’s Vedanta Group in 2011 — all taxes were paid on the $8.7 billion deal — but to its IPO in 2006.
At the time of the IPO, Cairn India was an empty shell of a company and all Cairn’s Indian assets were held by overseas subsidiaries of Cairn Energy. Since the idea was to create one big energy powerhouse, Cairn Energy took all the assets from various overseas subsidiaries and housed them in its wholly-owned Indian subsidiary Cairn India. Since all firms were owned by Cairn Energy, there was no cash outflow from India. The reorganisation was approved by the Reserve Bank of India, the Foreign Investment Promotion Board and the Securities and Exchange Board of India. Cairn Energy’s argument is that since there was no transfer of shares in 2006, no capital gains were made and no tax was applicable. The gains were made in the Vedanta sale, and all taxes were paid on that.