Given the UK-based Cairn Energy’s charge of the government being guilty of ‘expropriation of its investments in India’, the last thing the taxman should have done was to direct Vedanta India Limited to give it the $104 million of dividend that was due to Cairn. The taxman directing Vedanta not to buy back Cairn’s shareholding in it, it could still be argued, was a restriction and not expropriation—but a similar argument cannot be made for the Cairn dividends being paid to the taxman. On the face of things, the taxman is only trying to collect on its original $5.6 billion demand on Cairn—this was followed up by a penalty in April. What is problematic, however, is the taxman seeking to do this while the Cairn arbitration is still going on. It is also not clear if the move on dividend is the first of more actions aimed at collecting the tax/penalty even before the case is decided.
What makes the case especially unfortunate is that, apart from being one of the UPA’s retrospective tax cases that the present government claims it is trying to resolve, it is very different from cases like Vodafone’s purchase of Hutch’s India assets where the retrospective tax was first applied in 2012. Whether or not the proceeds of the India assets can be taxed even when there was no law on this can be debated, but in the Cairn case, no money exchanged hands. Cairn did an IPO in India—IPO proceeds are never taxed anyway—because it wanted to create an Indian asset, but the IPO could just as well have been done overseas which is where, at that point, various Cairn subsidiaries that held the India assets were located. Interestingly, in September 2006, six months prior to its IPO, Cairn went to the FIPB which had finance ministry representatives, and submitted details of the corporate restructuring between various Cairn companies and its Indian subsidiary, Cairn India. While clearing this, the FIPB did not talk of possible tax liabilities. When the share transfers—between the Cairn companies which were related parties—were examined by a transfer pricing officer (TPO), the issue of taxes was never raised either. Indeed, in 2011, when Cairn sold a 40% stake in the Indian venture to Vedanta and paid $536 million of tax on this, the tax on the IPO was never brought up—this was done only after the retrospective tax amendment.
You may also like to watch this video
The government would do well to keep in mind its actions are being keenly watched all over the world. If it cannot even wait for an international arbitration panel to rule before it tries to enforce its retrospective-tax demand—one which the BJP campaigned against when it was not in power—investors cannot but be seriously worried.