AFRENCH court’s order allowing Cairn Energy to seize 20 Indian Government assets in central Paris, including luxury flats meant to accommodate visiting VIPs, to recover an arbitration award of $1.7 billion has surprised many. But what is more surprising is the Finance Ministry’s statement that it had not received any notice and that it was trying to ascertain facts, even as it maintained that India was open to an amicable solution to the dispute within the country’s legal framework. The dispute began in 2014, when British energy giant Cairn received a Rs 10,247-crore tax demand notice over the group’s reorganisation done in 2006 as the Indian Government claimed that the company made a capital gain of Rs 24,503 crore in the process. Cairn went for international arbitration at The Hague to challenge the retrospective tax. It was awarded $1.2 billion plus costs and interest, which totals $1.7 billion, in damages from the Indian Government.
A similar award was given by the Permanent Court of Arbitration, The Hague, last year when it ruled that India’s retrospective demand of Rs 22,100 crore as capital gains and withholding tax imposed on Vodafone for a 2007 deal was in breach of the guarantee of fair and equitable treatment. After Vodafone won a case in the SC in 2012, Parliament amended the law to raise the tax demand again against the telecom company, forcing it to go for international arbitration.
Parliament does have powers to enact laws to impose retrospective taxes. But when such powers are used to nullify a judicial finding, it vitiates the business environment and discourages potential investors. Such relentless pursuit of tax liability of companies, even after court/arbitration rulings in their favour, runs counter to the government’s commitment to root out ‘tax terrorism’ and adversely impacts the investment climate. Given that India’s growth has been hit during the Covid pandemic and the country needs foreign direct investment to augment its development and generate employment, it would be better to end uncertainty about India’s tax regime to boost investors’ confidence.