Cairn India now faces tax, interest bill of Rs 20,000 cr

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New Delhi | Updated: March 14, 2015 1:30:18 AM

After Cairn Energy, the income tax department has now put the onus of paying the tax on the UK-based firm...

After Cairn Energy, the income tax department has now put the onus of paying the tax on the UK-based firm’s 2006-07 recast on locally incorporated arm Cairn India.

The department has asked Cairn India to pay R20,495 crore by way of taxes and interest arising from its erstwhile UK parent’s internal reorganisation involving Indian oil and gas assets, the company informed stock exchanges on Friday. Cairn India said the tax demand was for an alleged failure to deduct withholding tax on alleged capital gains arising during 2006-07 in the hands of Cairn UK Holdings, its erstwhile parent and a subsidiary of Cairn Energy.

These assets, which were held through a subsidiary in Jersey, were transferred to Cairn India before its listing in 2007. The tax department has invoked the retrospective taxation powers it was given in 2012 during the previous UPA government to issue the current tax demand on the transactions that took place about five years prior to that. Interest on the tax demand has, therefore, doubled the total outstanding amount that the department has claimed.

“A demand of approximately R20,495 crore (comprising tax of approximately R10,248 crore and interest of approximately R10,247 crore) is alleged to be payable. Cairn India Limited does not agree with this alleged demand and will pursue all possible options to protect its interest,” Cairn India informed stock exchanges. The company’s scrip closed Friday’s trading at R225.70, down 3.46% from its previous close.

The alleged short-term capital gains tax liability actually falls on Cairn UK Holdings, from which the Indian entity acquired its assets, but the law requires a resident company to deduct tax at source while making payments to non-resident companies for ease of collection.

Cairn UK Holdings was also served a tax demand on Tuesday for $1.6 billion (R10,039 crore) plus any applicable interest and penalties for the alleged capital gain it made on the transaction. The UK parent then issued a ‘notice of dispute’ to India under the India-UK bilateral investment protection agreement (BIPA). Any failure to reach a negotiated settlement could lead to an international arbitration.

The issue is expected to figure in finance minister Arun Jaitley’s discussions with the British Prime Minister David Cameron and the chancellor of exchequer George Osborne during his three-day visit to UK that began on Friday.

Cairn said it has always been fully compliant with all tax laws in India. “Income tax assessments including transfer pricing assessment were duly completed for FY 2006-07, earlier,” it said.

High Demand:

* Asked to pay R20,495 crore as taxes and interest arising from parent’s reorganisation of its Indian assets
* Tax demand for alleged failure to deduct withholding tax on alleged capital gains arising during 2006-07
* Cairn UK also served tax demand on Tuesday for $1.6 billion (R10,039 crore) plus interest and penalties

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