It was bad enough that, despite campaigning against the UPA’s ‘tax terrorism’, the NDA did little to fix things when it came to power. This was perhaps unavoidable since Parliament would loath to give up its right to tax retrospectively, even though it frightened all investors. Finance minister Arun Jaitley did the next best thing and said that he would abide by the judgment of the courts. So, if one of the courts said a tax like the Vodafone one was unjustified, he would accept that—this applied to arbitration courts as well. It was unstated, but obvious, that the government would take no action on the tax notices issued, except perhaps to keep reissuing them so that they did not expire. So, it came as a surprise when, in the case of Cairn Energy, the government decided to start acting upon the $1.6 billion notice (the penalties are separate). To begin with, the taxman seized Rs 440 crore of dividends due to Cairn Energy from Vedanta—when Cairn Energy sold its shares in Cairn India, it retained around 5% of Cairn India’s shares and the dividend was due on this; it seized another Rs 666 crore of dividends later, and another Rs 1,594 crore of capital gains taxes that needed to be refunded were also retained by the taxman. In addition, it seized Cairn Energy’s shares of Cairn India that, at the time, were worth around $1 billion.
Under normal circumstances, selling off seized assets to recover tax dues is a good thing. In this case, however, the dues were questionable. Unlike Vodafone’s purchase of Hutch’s India assets, for instance, no money exchanged hands in the Cairn India case. Cairn Energy did an IPO in India—and IPO proceeds are never taxed anyway—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, the FIPB never talked of a tax when Cairn submitted details of the corporate restructuring between various Cairn companies and its Indian subsidiary, Cairn India. 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.
Yet, when Cairn’s case against India is likely to be decided by the arbitration court in The Hague soon—final hearings are scheduled for two weeks starting August 20—it turns out the taxman has gone and sold off 40% of the Cairn shares it held, for $216 million. Why would the taxman want to behave this way and, in fact, confirm Cairn’s charge of ‘expropriation of its investments in India’? Apart from the signal this gives of how tax terrorism continues unabated in India, if the government loses, even if Cairn does not press for damages, it will want its $1 billion worth of shares returned, part of which have been sold for a lower value.