India will have to pay Cairn $1.2 billion ending one of the biggest tax disputes of the decade⁠— but the tax department may not have given up yet

India will have to pay Cairn $1.2 billion ending one of the biggest tax disputes of the decade⁠— but the tax department may not have given up yet
  • The Indian government had a claim of over $2 billion at the start of this decade on Cairn India for unpaid taxes. 2020 ends with India losing the case.
  • This arbitration with Cairn was one of the defining episodes of the last decade in India that contributed significantly to shaping the economy, and to some extent, the politics as well.
  • The retrospective changes to the tax law, targetting Cairn and Vodafone, was a big factor why Modi found love from the country’s capitalists who were incredibly irked by the United Progressive Alliance (UPA) government led by the Indian National Congress.
At the start of the decade, the Indian government had a claim of ₹24,500 crore (over $2 billion at the time) on Cairn India for unpaid taxes, as the then administration believed. While it may have lost the case but the country's tax department may not have given up yet.

A similar case against Vodafone, which India lost in September 2020 in an arbitration in Singapore, is likely to be challenged again, a Reuters report said citing sources.

The dispute escalated as the Finance Minister, the late Pranab Mukherjee, made retrospective changes to the law to ensure the government is able to get its pound of flesh⁠— contrary to what even the country’s Supreme Court held⁠— leading to an international arbitration.

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The arbitration has come to an end along with the year 2020 and the decade. It was one of the defining episodes of the last decade in India that contributed significantly to shaping the economy, and to some extent, the politics as well.

Here’s a brief history of the dispute between Cairn and the Indian government:

DateDevelopment
Jan 2007Cairn India got listed on the Bombay Stock Exchange after the local subsidiary at first, bought out the shares held by the Cairn Energy in the UK. Then, issued 60% stake in the Indian company back to the British parent before the IPO. The Indian government held that there was a capital gain in this transaction, for which a tax of ₹24,500 crore has to be paid.
Jan 2012The Indian Supreme Court ruled in favour of Cairn and struck down the tax department’s demand. In the meanwhile, Anil Agarwal-owned mining major Vedanta had bought the Indian subsidiary of the oil giant, paying $8.7 billion for 58.5% stake.
March 2012The Indian government was not going to let go easily. It amended the law to allow the taxman to claim tax dues retrospectively. And it wasn’t just to squeeze the money out of Cairn. There was a similar dispute with Vodafone as well.
March 2015Cairn initiated an international arbitration against India’s claim. The hearings continued for over three years, until Dec 2018.
Sep 2020Vodafone won the arbitration against India’s demand for ₹22,100 crore in taxes.
Dec 2020The verdict has ordered India to pay up $1.2 billion including refund of taxes, shares kept by the government, and legal fees. However, the same day, a report said that India has challenged the verdict in favour of Vodafone.

Bharatiya Janata Party (BJP), which is the political outfit behind the current administration led by Prime Minister Narendra Modi, sat in the opposition benches at the time the laws were amended retrospectively. Their leaders called the move ‘tax terrorism’ echoing the sentiment of corporate India and foreign investors.

This one change in the law was a big factor why Modi found love from the country’s capitalists who were incredibly irate with the United Progressive Alliance (UPA) government led by the Indian National Congress. It was one of the last straws after a series of scandals and in 2014, Modi came to power with a thumping majority.
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After the latest loss in arbitration, the Modi government is weighing its options. “After such consultations, the government will consider all options and take a decision on further course of action, including legal remedies before appropriate fora,” it has reportedly said.

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