Given the political sensitivity of telling Parliament that it does not have the right to make retrospective legislation of the type then finance minister Pranab Mukherjee unleashed upon the country—repealing the law would, in effect, amount to just this—finance minister Arun Jaitley did the next best thing and promised to abide by the judgment on the courts. So if, for instance, the Bombay High Court ruled in favour of a company that was hit by the retrospective tax, Jaitley promised the government would accept the judgment and not pursue it all the way to the Supreme Court, where it would get further delayed. This also applied to cases that were in international arbitration panels since most of those hit by the retrospective tax were planning to file or were already in these courts.
Though this was a sharp climb-down from the BJP’s original promise to get rid of the UPA’s tax terror when it came to power, most investors accepted this as the best compromise possible under the circumstances since, the most important thing was, if the decision was taken by a court and went against the taxman, the Opposition parties couldn’t accuse the government of batting in favour of a corporate, of being a suit boot ki sarkaar.
The problem, however, is that the government hasn’t really lived up to its end of the bargain. In one case, though not a retrospective tax case, the government appealed a Bombay High Court judgment though the no-appeal policy had been extended to other tax cases also. And, in most cases of global arbitration, the government tried to delay them by not appointing arbitrators, by not agreeing to the umpire arbitrator, etc—and in the retrospective tax cases like those involving Vodafone and Cairn, the initial government stance was that tax disputes were something that could not even be arbitrated under various bilateral tax treaties.
In the case of Cairn Energy Plc, on the eve of prime minister Narendra Modi’s visit to Europe—he will visit the UK in a day or two—the tax department seized Rs 440 crore of dividends declared by Vedanta; while Cairn Energy sold the bulk of its holdings to Vedanta, it still owns around 5% shares in the company. Last year, the taxman seized Rs 666 crore of Vedanta’s dividend due to Cairn, and another Rs 1,594 crore of extra capital gains taxes Cairn had paid were not refunded to it. Even if you don’t take into account the time-value of this money, that’s around $420 million of seizures. Add to this, the $1 billion worth of Cairn’s shares that were frozen in January 2014. While these are worth around $850 million today, the opportunity cost of the loss is more considering that, with the $1 billion not available to it for investment, Cairn had to lay off staffers as it couldn’t invest in a project it had earmarked the funds for.
Seizing assets and freezing others is clearly not in the spirit of conciliation that the government promised when it came to power. The more immediate fear, assuming the arbitration case goes Cairn’s way, is whether the government will implement it or whether, as in many such international arbitration rulings such as the Tata-DoCoMo one where the government didn’t even have to shell out a rupee, the government will petition the courts to not implement it. The ruling is expected to come around October or November, so should the government lose, the Opposition will make much of it in the run-up to the elections. What investors in the UK and elsewhere want from Modi now is an assurance that, no matter what the verdict, the government will faithfully implement it.