The Cairn Mutiny: Retro taxes hit India hard

Updated: 15 Jul 2016 02:51 PM
In 2006, Edinburgh-based Cairn Energy Plc, prominent in the oil business internationally, transferred shares and money, held by Cairn UK Holdings Ltd. a subsidiary, to Cairn India. This, preparatory to its flotation on the Indian stock market, with an initial public offer (IPO), put out in 2007.


Cairn India was transparent in its information flow on its corporate structuring, processes, and filings with the stock market. Likewise, it made full disclosure to the Foreign Investment Promotion Board (FIPB), which includes finance ministry personnel.


The public issue of Cairn India stock was a success, and Cairn Energy Plc earned over Rs. 8,616 crores on its listing in the secondary market.


But there was allegedly much more than this earned, via Cairn UK Holdings Ltd, on the transfer of its foreign holdings into the Indian entity in 2006-07. This was subsequently reckoned, in 2014, to have entailed a capital gain of Rs 24, 503.50 crores.


In 2011, 58.5% of Cairn India majority stock in Cairn Energy Plc’s hands,was sold to Anil Agarwal’s Vedanta Resources, for $8.67 billion, and a transaction tax of over $536 million was paid to the Indian authorities.


Cairn India today remains one of India’s biggest foreign investments, cumulating to $6.5 billion, with the capacity to produce 1.7 lakh barrels of oil a day.


The remainder of Cairn India stock, still owned by Cairn Energy Plc is9.8%, valued, in a soft market for oil stocks, at $700 million, or about Rs 2,500 crores.


And then, in 2012, the Income Tax Act 1961 was suddenly amended, to include a tax liability on share transfers, both going forward and retroactively, thereby capturing transfers of shareholding in previous years.


In January 2014, months before the UPA lost power, the Indian tax authorities raised a demand of Rs 10,247 crores ( $1.6 billion) on capital gains of Rs 24, 503.50 crores, calculated by the Central Board of Direct Taxes (CBDT) on the original restructuring of Cairn India.


Cairn Energy Plc has refused to pay, citing provisions of a bilateral investment treaty between India and Britain, even though it doesn’t cover tax exemptions. It has stated further that it had not been allowed to conduct its business in India, and has suffered both losses and staff attrition as a consequence.


By this Cairn Energy Plc actually means the 9.8% remaining shareholding it was not allowed access to, throwing in other hardships alleged to bolster its case. The Government of India has indeed frozen its shares worth $700 million, pending settlement of its tax demand.


But, since the tax demand is raised on Cairn India, possibly it will eventually devolve to Anil Agarwal, being his pigeon now, unless, as is likely, this law is repealed after all.


Meanwhile, the original tax demand has trebled, with interest and penalties, to over Rs 29,000 crores, and counting.


This amendment to the tax laws, seen as totally unfair by foreign investors, has done incalculable harm to India’s reputation. Instituted during Prime Minister Manmohan Singh’s second term, it has effectively choked off a good deal of the FDI.


And though the present Modi Government says it will not make any fresh retrospective tax demands, the statute continues to sit, tight as a rotweiller, atop the income tax law.


As long as it isn’t repealed, and tax demands have been raised according to it, they cannot be set aside. Not till the courts in India have adjudicated on the cases pending before them.


Technically, arbitration awards, here and abroad, that involve any waiver of the liability, even if agreed to by the Government of India’s representatives, are not legally binding either.


It has embroiled not only Cairn, but Vodafone, Shell, SABMiller, and others. However, no entity slapped with this retrospective tax has paid up. Everyone has gone to court or arbitration instead.


Why the then UPA Finance Minister, Pranab Mukherjee, now the President of India, decided to sponsor the amendment, is probably understandable. The UPA Government, suffering from a vastly slowed economy and moribund revenue generation, wanted to garner more money for its coffers.


It justified the essentially punitive move, by citing other countries that had taxation on transfer of shares/assets.


But, India made its own case bad by enacting it with retrospective effect. Those affected by it before 2012, had no prior knowledge of its provisions after all.


And now, Cairn Energy Plc, not to be outdone in the unreasonable stakes, has counter- sought $5.6 billion in compensation from the Indian government instead.


(Gautam Mukherjee is an economic and financial affairs analyst.)