The Permanent Court of Arbitration at The Hague on Wednesday ruled in favour of energy firm Cairn Plc over a retrospective tax demand worth ₹24,500 crore pursued by India’s taxmen since 2014. It has ruled that the tax levy, pertaining to a corporate reorganisation exercise undertaken in 2006-07, falls foul of the India-U.K. bilateral investment pact . The timing could not have been worse for the government — expiry of a three-month deadline to contest a similar retrospective taxation case lost against Vodafone this September. But unlike the telecom case, where the government would only need to fork out around ₹80 crore if it were to concede defeat, this verdict includes a sharp $1.4 billion payable as damages to Cairn. The damages arise from tax authorities’ decision to take by force and subsequently sell the company’s shares, and freeze dividend payments as well as tax refunds, to recover the disputed tax dues even as the arbitration process was under way. This outcome has repercussions, not in the least for an arbitration plea filed over the same tax demand by Cairn’s parent firm, Vedanta, whose verdict is awaited. Second, perhaps, the fiscal implications of such a large payout to Cairn when the exchequer is cash strapped, may have galvanised the government’s mind about challenging the Vodafone verdict after much dithering. Ostensibly, because it cannot take a different stance on two similar cases, the Centre has now filed an appeal in the Vodafone matter in Singapore. A similar appeal too can be expected on Cairn.
Finance Minister Nirmala Sitharaman has repeatedly asserted that India retains the sovereign right to levy taxes. The arbitrators do not seem to be disputing that. The fact is that this government has asserted from the outset it is not in favour of retrospective legislative changes. PM Narendra Modi had promised to resolve concerns on retrospective taxation, introduced to global consternation in 2012 by then Finance Minister Pranab Mukherjee after losing a tax battle with Vodafone in the Supreme Court. The Cairn order even refers to statements by BJP leaders like the late Arun Jaitley terming the retrospective amendments as ‘tax terrorism’ while in the Opposition. The guilty clauses could have been scuppered in the first NDA Budget itself, but barbs about it being a ‘suit, boot Sarkar’ then, that compelled the government to retract land acquisition reforms, may have dampened the enthusiasm for ‘investor-friendly’ changes. Losing the arbitrations in the most-watched cases under a troublesome law that has hurt India’s investment credibility, provided a cathartic opportunity to let go, while resting the blame for the mess on the UPA. In doubling down instead, the government has scored a self-goal. Its aspirations to rope in global investments must be matched by ensuring policy stability and creating a robust regulatory framework.