India’s retroactive tax claims have plagued the government. The Permanent Court of Arbitration has awarded oil and gas explorer Cairn $ 1.2 billion in damages plus interest and expenses. What options does India have?
By Shivanand Pandit
A second hostile verdict against India in three months resulting from the divisive 2012 tax law change is a rude awakening. An arbitration tribunal of the Permanent Court of Arbitration in The Hague found India guilty of violating its obligations to the Scottish oil and gas producer Cairn Energy under the bilateral investment agreement between Great Britain and India. Cairn received US $ 1.2 billion in damages plus interest and expenses.
The final amount India would have to pay if not faced with the award is likely to be $ 1.4 billion, or more than 10,500 rupees. The Tribunal also stated that India must make no further efforts to recover the unconfirmed tax liability or interest and / or fines arising out of this presumed liability through any other process.
In response to the verdict, the Treasury Department stated that the Government of India would review the verdict and find a way forward including legal solutions. The government has 90 days to file a lawsuit against the decree.
This is the second blow to come from the confrontation change after Vodafone plc waged an international arbitration war against India’s rupee 22,100 retrospective tax claim. On September 25, 2020, the Permanent Arbitration Court ruled that the Indian government’s retroactive tax claim against Vodafone violated the guarantee of fair and equitable treatment under the amicable investment protection agreement between India and the Netherlands. The Indian government has challenged the judgment in the Vodafone case from the seat of the Permanent Court of Arbitration in The Hague, Singapore.
The tax claim against Cairn Energy plc dates back to fiscal 2006-2007. This year Cairn UK transferred shares in Cairn India Holdings to Cairn India as part of the internal reorganization. Income tax officials alleged Cairn UK made capital gains and hit with a tax claim of Rs 24,500. The company declined to pay due to various clarifications on capital gains, leading to cases before the Income Tax Appellate Tribunal (ITAT) and the High Court. Cairn lost the case at ITAT and a capital gains valuation case remains undecided in the Delhi Supreme Court.
In 2009 and 2011, Cairn sold its stake in Petronas and Vedanta and paid a capital gains tax of around Rs.3,700 billion on those deals. Thereafter, similar transactions that occurred in 2006 were re-examined. However, no ultimatum was given for taxes. Tax officials chose Cairn after the retroactive tax law was announced in 2012.
Retrospective taxation enables a nation to enact a regime to tax certain products, items, services, transactions, and fee companies prior to the date the law is approved.
In 2012, the government lost its case against Vodafone plc in the Apex Court and then Treasury Secretary Pranab Mukherjee passed an amendment to income tax legislation that made tax liability retroactive, making the Income Tax Department retrospectively tax such transactions. The law was approved by Parliament that year and the burden of paying the tax fell back on Vodafone, and the similar provision of the tax was also applied to the transfer of shares by Cairn Energy plc.
In 2015, Cairn initiated international arbitration proceedings against the Government of India under the UK-India bilateral investment treaty. The arbitration set out to determine whether India had broken its contractual responsibility to protect Cairn’s investments in India by retrospectively linking a newly enacted capital gains tax law to an internal corporate restructuring started in 2006.
According to Cairn, the company seeks full compensation for losses resulting from the expropriation of its investments in India in 2014, constant attempts to implement retroactive tax regulations, and failure to treat the company and its investments fairly and fairly.
Cairn also mentioned that there are lawful policies in place authorizing that the maximum amount that could ultimately be reclaimed by the department is limited to the value of Cairn UK Holdings Limited’s assets, mainly common and preferred shares, almost all of which previously sold and / or redeemed, plus the withheld dividends and tax refunds from 2009 and 2011.
The climax is the arbitration, which declares that the tax claim against Cairn is inconsistent with the bilateral treaty between Great Britain and India and plaintiffs are exempt from any obligation to pay. It has also directed the respondent, the Government of India, to mitigate the persistent effects of demand by eternally thinning demand.
It is sad that the Cairn Energy plc government has to pay a lot of money when its revenues are strained as a result of the economic stalemate following the pandemic. By mid-December 2020, the tax collection from the corporate income tax segment is approximately 5 percent lower year-over-year and is 2.39 billion rupees, and the tax collection from the personal pre-tax segment is approximately 11 percent lower year-over-year and is Rs 60,491 crore. According to government figures released for April to October 2020, gross tax collection was 8.75 billion rupees, a decrease of around 17 percent compared to the corresponding period last year.
Six years ago, in 2014, when the BJP released its election manifesto or election strategy, it criticized the Congress-led UPA government for promoting “tax terrorism” and “insecurity” in the nation. The strategy of the congress not only had a negative impact on the investment climate in India, but also damaged the country’s image.
The current situation shows, however, that the Modi government is promoting the extremely combative policies of the UPA government, instead of introducing a non-argumentative and favorable tax environment. Following the loss of arbitration in the Cairn episode, the government decided to appeal to the Singapore Permanent Court of Arbitration against Vodafone’s retroactive tax ruling.
In addition, the government has mentioned that it is examining the Cairn case and is likely to appeal the judgment. This would definitely be a mistake and would send inappropriate signals to the investing community. Instead, the government should accept and respect the orders and ensure a good burial of the retroactive taxation issue.
Former Union Treasury Secretary Arun Jaitley equated retroactive tax rules with tax terrorism and, paradoxically, the Cairns case decision took note of this and other disagreements among BJP leaders over retrospective changes and international disputes. Therefore, the government should comply with the ruling to bury the inheritance rather than finding ways to override judgments.
Furthermore, it would be an unwise assumption to expect the domestic courts to increase the arbitration award. The government must distance itself from retrospective taxes that have harmed India’s goodwill.
Also read: Financing lawsuits: For a piece of justice
The NDA government would have removed the controversial income tax provisions in its first budget itself. But it was busy blaming Nehru’s legacy and other irrelevant matters. The government scored a self-goal by losing the two arbitrations under a disruptive law. This will have an impact on future investment and confidence in the Indian government’s policies.
– The author is a finance and tax specialist, writer, and speaker based in Margao, Goa