India lost Retrospective taxation case to Cairn

Synopsis: In a 2nd setback after Vodafone case, Indian government has lost an International arbitration case to energy giant Cairn, on the issue of retrospective taxation.  

Introduction 

• The Indian government has lost an international arbitration case to energy giant Cairn Plc over the retrospective levy of taxes, and has been asked to pay damages worth RS. 8000 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 allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed. 

• 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. 

What is the case? 

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.  

• Owing to different interpretations of capital gains, the company refused to pay the tax. 
• This prompted cases being filed at the Income Tax Appellate Tribunal (ITAT) and the High Court. 

What is the verdict of Court? 

The Permanent Court of Arbitration at The Hague has maintained that the Cairn tax issue is not a tax dispute but a tax-related investment dispute and, hence, it falls under its jurisdiction. 

• India’s demand in past taxes, it said, was in breach of fair treatment under the UK-India Bilateral Investment Treaty. 
• The GOI was ordered to compensate for the total harm suffered together with interest and cost of arbitration.  

The order does not contain a provision for challenge or appeal. Moreover, Cairn can use the arbitration award to approach courts in countries such as the UK to seize any property owned by India overseas to recover the money if the award is not honored.  

Way forward- 

Government needs to assured global investors that concerns over retrospective taxation would be taken care of.