The image of ease of doing business in India has suffered another hit after U.K.-based oil major Cairn Energy filed a case in a US court to enforce a $1.2-billion arbitration award it won in December 2020.
India has lost two international arbitration cases within three months. It lost against Vodafone in September 2020 after the Permanent Court of Arbitration at The Hague in the Netherlands ruled that India’s retrospective tax demand of $2 billion “breached the guarantee of fair and equitable treatment”.
India had modified its tax laws retrospectively in 2012 to make them effective from 1962. India had used this clause to levy backdate tax charges on Cairn and Vodafone, and both firms moved the Permanent Court of Arbitration at The Hague. Apart from Vodafone and Cairn, India had also raised retrospective tax demands on many other firms, including French pharmaceutical major Sanofi.
“This entire issue of the retrospective amendment is an unfortunate thing,” Shriram Subramanian, founder and managing director of corporate governance advisory firm InGovern Research Services, told Zenger News.
“It is regressive. When these two cases [Vodafone and Cairn] were lost in international arbitration and even the India-appointed arbitrator voted against the imposition of such an award, it is difficult to fathom the bone of contention for the Indian government is,” Subramanian said.
“Such retrospective tax claims can be part of a technical debate,” Amit Tandon, founder and managing director of proxy advisory firm Institutional Investor Advisory Services, told Zenger News.
“But what I can say is that anything that deviates from three principles — clarity, predictability, and stability (about tax laws), markets don’t like it,” Tandon said.
In its recent appeal, Cairn pleaded before the U.S. court to recognize the arbitration award, including interest payments, since the Indian tax department attached its assets in 2014. This is the oil major’s first move to recover its dues from the Indian government.
“Over the years, we have built a legacy business in India that has generated over $20 billion of revenue for the government of India,” Cairn Energy Chief Executive Officer Simon Thomson said in a Twitter post.
“It has shown massive growth for the local population of Gujarat, Andhra Pradesh, and Rajasthan. Now that the arbitration has been finalized, we would want the Indian government to act swiftly on it. This is important for our shareholders,” Thomson said.
Cairn Energy has begun reconciliatory moves to receive the tax award. Thomson has requested a meeting with Indian Finance Minister Nirmala Sitharaman. While it is not clear whether Sitharaman will agree to a meeting, Thomson is likely to meet the finance secretary on Feb. 18.
“There has to be some point where the Indian government has to say that it is hurting investment, and it is not worth creating uncertainty (concerning tax laws),” said Subramanian.
“India has attracted a fair amount of foreign direct investment in recent years. But, it could have been more without these tax disputes,” he said.
To turn India into a $5-trillion economy by 2024, Indian Prime Minister Narendra Modi’s government is aggressively attracting foreign investments into the country. Despite a pandemic year, total foreign direct investments in India rose 13 percent in 2020 to $57 billion compared with a 4 percent rise in China.
“The Indian start-up space has been attracting a good amount of foreign direct investments in recent years. Such tax claims don’t augur well for the ecosystem, though flows have not been impacted so far,” said Navin Kumar Rungta, founder of legal compliance firm eLagaan.
The tax dispute involving Cairn is a long-standing one.
The oil firm received its first tax claim notice in January 2014 from India’s income tax department about a group reorganization done in 2006. Under this restructuring, Cairn UK had transferred shares of Cairn India Holdings to Cairn India.
Owing to this reorganization, done just before its initial public offering in India in 2007, the department contended that the U.K.-based oil major had made capital gains through the transfer of such shares.
In 2011, Cairn Energy agreed to sell a majority stake in its Indian unit to mining billionaire Anil Agarwal’s Vedanta group, barring a minor stake of around 10 percent.
Though Cairn was keen to divest the residual stake after the sale, it was restricted from doing so by the tax department pending the tax claim. Following the merger of Cairn India with Vedanta in 2017, the UK firm’s shareholding came down to below 5 percent in the combined entity.
In its bid to recover dues from Cairn India, the tax department attached the shares Vedanta along with the dividends in 2014. Challenging these claims, Cairn Energy initiated the international arbitration proceedings in 2015.
India, after having challenged the Vodafone arbitration award in the Singapore court in December 2020, wishes to take the same route in the case of Cairn.
In its bid to reduce retrospective tax litigations, India terminated bilateral investment treaties with 57 countries. It also came up with a new framework for entering into new bilateral investment treaties in 2015.
“There is no logic to this kind of retrospective amendment. That is why these cases have gone to international arbitration and technically, these couldn’t stand (the scrutiny),” Rungta said.
(Edited by Gaurab Dasgupta and Amrita Das. Map by Urvashi Makwana.)
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