India Lost Retrospective Taxation Case to Cairn

India lost Retrospective taxation case to Cairn

The Government of India lost an international arbitration case to energy giant Cairn Plc over the retrospective levy of taxes, and has been asked to pay damages worth $1.2 billion (Rs 8,842 crore) to the UK firm. This is the second setback for Indian government related to retrospective taxation after it lost the arbitration case against Vodafone.

What is retrospective taxation?

Retrospective taxation is generally reserved for taxes that will be paid in the future. The retroactive nature of this means that once a tax is paid, and then subsequently dis-paid, then the company must pay retroward from the time that the law has been passed. Essentially, it means that a business believes that their loss is larger than it would have been were it paid as a separate charge today. This is why companies who have lost an appeal of a retroactive tax are often forced to pay the entire amount over a certain period of time.

Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes. Apart from India, many countries including the USA, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies. 

Why India lost Retrospective taxation?

• The issue relates to whether retroactive taxation applies to share transactions after 2006-2007 given that it was a final disposal of assets listed on an exchange had taken place.
• The government has demanded the return of over $2.74 billion, stating that the company was run beyond its financial competence.
• Even the entire UK stock market regulator, the Financial Conduct Authority (FCA) has filed a separate petition to block the settlement, saying Cairn did not fulfil its financial obligations in due course of business.
• The case pertains to the tax demand related to an alleged Rs24,500 crore worth capital gains it made in 2006 while transferring all its shares of Cairn India Holdings to a new company, Cairn India, and got it listed on the stock exchanges.  
• However, Cairn argued the retroactive application of a newly enacted law is a breach by India of its obligations under the Treaty(UK-India Bilateral Investment Treaty) to treat Cairn and its investments fairly and equitably and refrain from unlawfully expropriating Cairn’s assets.

What has the arbitration court said?

In its judgment, the Permanent Court of Arbitration at The Hague said Cairn Tax Issue was not just a tax related issue but an investment related dispute, and therefore under the jurisdiction of the international arbitration court.

Akin to the ruling in the Vodafone arbitration case, the PCA at The Hague has once again ruled that the Indian government’s retrospective demand was “in breach of the guarantee of fair and equitable treatment”.

It has noted that Cairn UK’s argument that the demand on them was made after the Vodafone retrospective tax demand, which has since been set aside by Indian courts.

What is Permanent Court of Arbitration?

The Permanent Court of Arbitration (PCA) is an intergovernmental organization located in The Hague, Netherlands. It is not a court in the traditional sense, but provides services of arbitral tribunal to resolve disputes that arise out of international agreements between member states, international organizations, or private parties. The purpose of the PCA is to promote real and effective peace and security in the world by providing a neutral forum free from political influence for disputes that do not fall within the ambit of national laws and jurisdictional disputes.