A Taxing Verdict for the Indian Tax Man

The Permanent Court of Arbitration at the Hague, in its arbitral ruling, has once again dealt a blow to the Government of India by ruling in favour of the gas and oil exploration company, Cairn Energy Plc over tax disputes. The verdict comes post the September 25, 2020 victory of Vodafone International Holdings BV against the Indian government over the same dispute relating to the retrospective tax amendment in 2012. 

In 2006-07, Cairn UK, as part of an internal rearrangement process, transferred shares of Cairn India Holdings to Cairn India. Later, in 2011, the Edinburgh-headquartered organisation sold its Cairn India stake to the mining conglomerate Vedanta. In January 2014, the Indian income tax authorities, in view of the retroactive amended income tax law, alleged that the gas exploration firm made capital gains of ₹245.03 billion in the rearrangement process and hence was liable to pay a tax of ₹102.47 billion to the authorities. The company’s interpretation of Indian laws on capital gains differed, and consequently, it refused to pay the amount. In response, the authorities stopped the sale of the 10% stake to Vedanta and froze dividend pay-out to UK based parent company.  

In 2015, Cairn initiated an international arbitration proceeding against the Indian authorities under article 9 of the Agreement between the Government of the Republic of India and the Government of Great Britain and Northern Ireland for Promotion and Protection of Investments (India-UK BIT). Countries enter into treaties, especially tax treaties, to prevent double taxation of corporations’ incomes earned by foreign investments, so as to promote a healthy business relationship and trade between two countries in this growing globalised world.

The purpose behind the said BIT provision was also the same, i.e. ensuring protection of the investors of the contracting state against any disruption/harassment of business in the territory of the host state. (See, Fair and Equitable Treatment – UNCTAD Series on Issues in International Investment Agreement II).

A final assessment order was slapped on the oil corporation in 2016, which included interest amounting to ₹188 billion, in addition to the principal tax amount.  

The three-member international arbitration tribunal, including a nominee of the Indian government, unanimously ruled in favour of the exploration organisation, and ordered the Indian administration to compensate the former for the total harm suffered including interest and the costs of arbitration. In its judgment, the arbitration panel said, “Tax demand against the claimants (Cairn Energy Plc and Cairn UK Holdings Limited) in respect of AY (assessment year) 2007-08 is inconsistent with the treaty and the claimants are relieved from any obligation to pay it and [the tribunal] orders the respondent (Indian government) to neutralise the continuing effect of the demand by permanently withdrawing the demand.

A sovereign country has the power to impose tax from a retrospective date. Nonetheless, such an action when a past transaction, which was not liable to taxation as on that date, is taxed under the aegis of a retrospective amendment, it is naturally seen to be unjust and discriminatory. Officials usually defend the amendments by stating that such moves are brought into effect to correct earlier flaws that defeated the purpose of the legislation in the first place. 

It would be interesting to observe India’s follow-up on the issue. The government has until this month to challenge the award in a higher court in Singapore. By February end, Cairn’s CEO Simon Thomson in his conversation with the Ministry of  Finance conveyed the corporation’s desire for a speedy resolution that is in the interest of all stakeholders involved. The government has hinted that the only possible solution for both parties to avoid further litigation is for the former to agree to the government’s 'Vivad se Vishwas' (From Litigation to Trust)  tax amnesty. This scheme, announced in the Indian Budget 2020, provides speedy resolution for tax disputes in the forms of certain compensation between individuals and the tax department.

The oil discovery company aims to enforce the award under international arbitration rules, and can use this judgment to approach courts in countries like the UK, USA to seize any overseas property owned by India, to recover the money if the award is not honoured. If it does happen, India would not be the first country to face seizure of its international assets from an energy company. In 2019, US Oil firm ConocoPhillips, under international arbitration law, seized Venezuela’s overseas assets to execute an arbitration award of more than $8 billion. Cairn is reportedly identifying India’s overseas assets, including bank accounts and even Air India planes or Indian ships, that could be seized in the absence of a settlement.

It is also worthwhile to note that if the Indian government accepts the award, then this move would be welcomed by the business corporations. India's reputation has taken a severe beating as a result of these cases. The BJP government has, in the past, denounced the introduction of a retrospective tax amendment by the previous Congress government as "tax terrorism". Prime Minister Narendra Modi had promised to bring an end to "tax terror" after coming to power in 2014. However, the opposite happened when the government carried on with the case. 

For a government struggling to find revenue and seeking to boost its economy post-COVID-19, it is essential for the government to reduce compliance troubles and stumbling blocks such as retrospective taxation, lest it finds itself seriously damaging its potential post economic liberalisation.


Khushboo Pandey

An Economics student endeavouring to comprehend the Economics & Finance world.

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