Centre Scraps Retrospective Tax: Refund for Cairn, Yet Denied a Win

Video Producer: Shohini Bose
Video Editor: Rahul Sanpui

So finally, the government has realised its folly and it has rolled back the retrospective tax amendments that were done in 2012.

Let me remind you what happened then. At that time, the government of India had lost the Vodafone tax case in the Supreme Court. The government was very unhappy with that loss, and therefore, almost like a retributive move, it brought in a tax amendment, in which it said that these kind of transactions – the Vodafone kind of indirect asset transfers, will now be taxed retrospectively, all the way back to 1962.

They said, "We'll go back 50 years and reopen these cases." Everybody told the government this was a bad move; "Please don't do this". But the government was adamant.

India's Dispute With Cairn Energy

Former Finance Minister Pranab Mukherjee was then completely adamant that he had to do this. Therefore, this resulted in a lot of criticism and a lot of punitive action by the government's tax department.

In 2014, when the Modi government came in, it was widely expected that in the very first budget, the then Finance Minister, Arun Jaitley, would roll back or nullify this amendment. But to everyone's surprise, he did not.

The Modi government went ahead and did another Vodafone and this time, with Cairn Energy. So, a similar punitive action was done on Cairn Energy for a restructuring they had done way back in 2006-07. But the tax was imposed on them in 2014-15, when the government went beyond just imposition of a tax. They actually, forcibly acquired the 10 percent shareholding that Cairn Energy held in the company that they had sold to Vedanta.

Equal Blame of Manmohan and Modi Governments

The government of India impounded those shares, took over them, sold them in the market, and said that they will recover the tax – even while the matter was under adjudication. They also impounded their dividends and held back the tax returns. The whole world told India that it was a wrong thing to do but the government of India still went ahead. This is the Modi government that did that.

So frankly, there is an equal blame on Manmohan and Modi government for being so retributive in the retrospective tax cases of Vodafone and Cairn Energy.

These two aggrieved companies went to the International Court of Arbitration. Both of them won stunning victories at the International Court of Arbitration, where it was held that India had acted wrongly – our tax laws were being wrongly used and that, these companies deserved to get compensation. Even the India-appointed arbitrator on the panel voted against India's case.

Refund For Cairn Energy

There was a unanimous verdict against India and Cairn Energy, which was given USD 1.7 billion in refunds, interest, cost, and damages, moved to enforce this tax award that they were given – the fact that they could get the refund from the government of India for the shares that were sold.

The government of India continued to say that they will not compromise, they have a sovereign right to tax, will not agree to refund, and they will continue to fight till they win in the international court.

Cairn Energy continued to win in several other forums. They won in Paris. They moved seizure orders against Indian assets. In Paris, they won an order for about 20 properties of the Indian government that they could seize. They said they would also move against Air India because that is an instrumentality of the government. And they will seize Air India's planes.

But Denied a Win..

So clearly, the government of India was getting boxed into a corner, on what was clearly seen, all over the world, as a very wrong move on the part of the Government of India. They were cornered, they feared seizures, they knew what they had done was bad in law. So, they tried to make the best of a very bad situation by withdrawing the Retrospective Tax law. It is a welcome move.

But what I still think is a bit of a worry is that they have said they will only return the principal amount of the tax that they took – that they will neither give cost nor damages, nor interest. Now, I can understand that you don't want to give cost and damages, but the interest should be given.

Also, I hope that there has been some back-channel discussions with Cairn and Vodafone that they will accept this new law of the government. Because if they don't accept, and the cryptic statement that has come from Cairn – saying that they have noted what the government of India has done and that they will assess it.

But I hope that it has already been discussed that this new law is acceptable to them, that this will not go into further litigation, and that they will not reject this new law. Because, if that were to happen, the move that the government of India has made is likely to continue to fester and not solve the problem that it sought to solve.