Govt to take call on Cairn tax case next week

By: | Published: August 8, 2015 12:40 AM

Arun Jaitley to take final call; finmin discusses govt’s approach in general on demands for international arbitration

An inter-ministerial group will next week firm up what course of action the government should take on Cairn UK Holdings’ demand for international arbitration to resolve the Rs 20,000-crore tax demand it is facing over the reorganisation of its Indian assets prior to Cairn India Ltd’s initial public offering in 2006-07.

Sources said the ministerial group would recommend an approach to finance minister Arun Jaitley, who would take the final call.

The income tax department had earlier rejected international arbitration as an option to resolve the tax dispute. It is likely that the government will hire an arbitrator by December this year, as without one it cannot even drive home the point that tax disputes are not covered by the UK-India bilateral investment promotion and protection treaty.

The finance ministry had recently informed Cairn that taxation was a sovereign subject not covered by international arbitration.

Ministry officials on Friday discussed what should be the government’s approach in general on demands for international arbitration raised by businesses on tax matters. The department of economic affairs is working on a new draft of bilateral investor protection agreements for renegotiating existing treaties and exclude taxation from their purview.

Vedanta Resources, which bought a majority stake in Cairn India in 2010, too has served a notice of claim to the ministry under the treaty to protect its interests. According to the companies, the treaty provides for full protection of their investments.

It also provides for fair and equitable compensation for any asset that is expropriated at the fair value of such asset prior to such attachment. The government had in January 2014 frozen the 10% shares that Cairn Energy Plc has in Cairn India, its former subsidiary which is now a part of the Anil Aggarwal-controlled Vedanta group.

Cairn Energy says the freezing of the shares was an unexpected event and that resolving the issue a high priority.

Cairn has already named former Bulgarian minister and lawyer Stanimir A Alexandrov as its arbitrator. The arbitrators of both the sides would decide on a neutral arbitrator, who would decide on the dispute.

The tax demand is on account of the alleged failure to deduct tax on alleged capital gains arising during 2006-07 in the hands of Cairn UK Holdings, the erstwhile parent of Cairn India. The Rs 20,494-crore ($3.293-billion) tax demand from Cairn India comprises Rs 10,247 crore of tax and an additional identical amount as interest.

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