As Cairn moves to attach AI assets, Centre must stop digging in its heels on retro tax, or risk losing investor confidence
The legal dispute between Cairn Energy Plc (CEP) and the Union government has taken an ugly turn with the British oil major filing a lawsuit in New York, seeking to enforce an international arbitral tribunal’s award by seizing assets of Air India.
The move follows a December 2020 ruling by the Permanent Court of Arbitration (PCA) which declared the Indian government’s Rs 10,247 crore tax demand from Cairn Energy inconsistent with the India-UK bilateral investment treaty. In early 2015, the Indian tax authorities slapped a tax demand on Cairn Energy on the grounds it had made capital gains of Rs 24,500 crore in a group reorganisation.
The genesis of the dispute lies in the retrospective amendment to a section of the I-T Act in 2012 under the watch of then finance minister Pranab Mukherjee. At the time, the levy was slapped on Vodafone Plc. While the UPA-2 lost credibility due to the decision, it is unfortunate the NDA’s approach hasn’t been any different.
Indeed, the government isn’t willing to alter its stance even after the PCA directed the government to permanently withdraw the demand decision. To not honour a ruling at this level—the government appealed the ruling in late March in the Netherlands, on grounds of sovereignty and tax avoidance—can’t inspire confidence within the global investment community. Foreign investors are looking for a fair and equitable business environment, not regulatory uncertainty.
Changes in the law are bad enough, as are flip-flops in policies, but persisting with bad legislation—the retrospective amendment—can’t help the investment climate. They can jeopardise the country’s credibility and deter foreign investors from making the kind of chunky investments that Vodafone and Cairn have. If the country is looking to attract foreign investments, the approach needs to be far more friendly, even conciliatory. Rather than appeal the PCA’s award, which asked it to pay Cairn Plc $1.2 billion plus interest in compensation, the government should have let go.
Having promised it won’t engage in any tax terrorism, the NDA must strive to achieve this. In this instance, the taxman contended that, under Indian law, the 2006 transactions were taxable because they were tax-avoidant and also because they involved the indirect transfer of underlying immovable property, including the natural resources assets (in this instance, oilfields).
The PCA tribunal, for its part, found the taxman’s immovable property defence an afterthought since it was raised for the first time before the PCA although the Indian government was fully aware of the 2006 transactions as they required several approvals. Prior to the 2006 deal, for instance, the restructuring—where Cairn’s overseas subsidiaries that owned the Indian assets got transferred to Cairn India—needed the approval of the FIPB; although the finance ministry would have been involved in this exercise, there was never any hint that a tax needed to be paid. Moreover, the IT department was found to be aware of the transactions at least by 2010, given it assessed the stake sale of Cairn UK Holdings in Cairn India to Petronas.
If the transaction was taxable under the I-T Act—as an indirect transfer of immovable property—there should have been an attempt to tax Cairn Energy much before 2014. Above all, the tribunal declared India had not upheld its obligations under the UK-India bilateral investment treaty, in particular, it did not give fair and equitable treatment to Cairn’s investments. Such observations could hurt India’s reputation, and the government must be mindful.