The case of Cairn Energy is truly embarrassing. If the tight slap from Vodafone was not enough, we are now getting a kick on the butt from Cairn! And all this is thanks to the ill-conceived and extremely damaging retrospective taxation brought in by the UPA in 2012.
To put it into a quick perspective – the FM then, late Pranab Mukherjee, in 2012 Budget amended the Section 9(1)(i) of the Income Tax Act. As per this – taxation was made retroactively applicable to all indirect transfers, which included transfer by a non-resident of a share in a company incorporated abroad, if the share derived, directly or indirectly, its value substantially from assets located in India.
This hit Vodafone and Cairn the most. Imagine, Cairn carried out an internal corporate restructuring in 2006. Then the 2012 amendment came out-of-the-blue and the India Govt in 2015 slapped Cairn with a draft tax assessment of Rs.10,247 crore. This tax demand was for a restructuring carried out 9 years ago and all done as per the law of the land then. Doesn’t it even read absurd?
Naturally, Cairn did not take it sitting down like a lame duck. It sued India at the Investor-State dispute settlement (ISDS). It blamed India for imposing retrospective taxes, violating India-United Kingdom bilateral investment treaty (BIT). In Dec’20 the ISDS tribunal ruled in favour of Cairn. India was found guilty of violating the fair and equitable treatment (FET) obligation of the India-UK BIT. The ISDS dismissed India’s argument that the 2012 amendment clarified the intent of Parliament regarding “indirect transfers” and that it was not retroactive.
The tribunal awarded Cairn $1.2 billion (Rs 9,000 crore), plus interest and costs, the company said in a statement after the ruling. The total damages are estimated at $1.4 billion for the Govt. While the Govt spent time, thinking about a way out of this mess, yesterday, Cairn filed a case in a U.S. district court to enforce this arbitration award, ratcheting up pressure on the govt to pay its dues. It plans to do the same, file its claim with regulators in France, Netherlands and Canada.
Those in the know say that this is a first step taken by Cairn to recover the dues, potentially by seizing Indian assets, if the govt did not pay.
This was a tax imposed without any justification. More importantly, it undermined the environment of legal certainty, the core of any investment decision into India. A retrospective tax is indeed tax terrorism.
The sad part is that UPA imposed it and when the BJP was in the Opposition then, it spoke about correcting this “tax terrorism” but it did zilch when it came to power in 2014. On one hand, the Govt keeps on talking of getting foreign companies to invest in India and then on the other, instead of correcting the mistake, it further perpetuates it, casting a long shadow over the actual intent.
And now obviously, the Govt will appeal and challenge the ruling, like the way it is doing with Vodafone, going on to further lose face.
We are being penny wise pound foolish. For a few dollars more, we are ruining our reputation and at this juncture, with all this hullabaloo in the international Press over the farmers agitation, arrest of 21-year old Disha Ravi and the falling edifice of democracy, Cairn is like a cherry on this unappetizing pie.