Around the same time that Prime Minister Narendra Modi was renewing his promise to end the retrospective tax regime — he did this while in London in November last year and then before a French delegation in the capital in January — the taxman sent a notice to the UK-based Cairn UK Holdings, renewing the freeze on the sale of its shares for another three months.
In January, Modi had made his strongest-ever statement on the retro tax, telling the India-France Business Summit, “Retrospective tax is a matter of past… We are ensuring that neither this government nor the future governments can open this chapter.”
The freeze relates to shares of Cairn India that Cairn UK Holdings was planning to sell to the Vedanta group two years ago — the shares, worth $1 billion then, are valued at around $300 million now. After the taxman slapped a R10,247-crore claim on Cairn Energy for an internal reorganisation done in October 2006 — Cairn Energy held its Indian assets through various overseas holding companies and these were transferred to Cairn India prior to its IPO — the shares were frozen.
The letter says “it is to inform you that provisional attachment of assets vide order u/s 281B of the Income Tax Act 1961 dated 22.01.2014 stands extended up to 31.03.2016”.
Though the arbitration between Cairn Energy and the government of India is now set to start since the final panel has been constituted, it is expected to drag on for at least a year since, right now, the government is still arguing that the tax dispute cannot be arbitrated.
Even if the government were to eventually lose the case, any arbitration award has to be implemented in India, and can theoretically be delayed for years, if not decades — the White Industries award has been pending since 2002.
Cairn Energy CEO Simon Thomson has already written to Prime Minister Modi asking him to help resolve the R10,247-crore case that has been dragging on for almost two years now. The letter, written after Modi’s assurances during his London visit last November, says, “However, as you are aware, Cairn Energy’s outstanding retrospective tax issue is yet to be resolved… The matter has been ongoing for almost two years and is having a major detrimental impact on our business and to our UK and international shareholders.”
While invoking its arbitration against the central government in September this year, Cairn Energy had pointed to how, after its money got stuck in India, the firm had to let go 40% of its workforce as it did not have the money to fund other exploration activities. After the sale, Cairn Energy had held on to $1 billion worth shares of Cairn India which the latter was in the process of buying back when the taxman froze the sale.
While arguing against the use of the retrospective tax, Cairn argues that even if, for the sake of argument, the taxable gain was said to have accrued in India, there was no transaction that resulted in a possible capital gains tax — no money changed hands when the shares were transferred, the only time a capital gains tax arose was when the shares were sold to Vedanta and a tax was paid on that.