Government finally brings down the curtain on the Cairn tax case

It finally looks like curtains for the long standing dispute between the government of India and Capricorn Energy PLC. OK, let me explains. Capricorn Energy is the new name of Cairn Energy which, once upon a time, had an Indian subsidiary Cairn India, which was later sold to Vedanta group. The entire dispute pertains to the tax that the seller of shares (Cairn Energy PLC) had to pay to the government of India, but was avoided using structures.

In a sense, the dispute that first began with the controversial Retrospective Taxation Bill of 2012, has been finally put to rest. The Indian government has reportedly paid Capricorn Energy PLC Rs.7,900 crore to refund taxes it had collected as a measure to enforce a retrospective tax demand. This is likely to be viewed positively by the international business community as it shows the government in good light, as being investor friendly.

When the government had put up claims to Cairn Energy back in 2012, it had confiscated the shares of Vedanta lying in the demat account of Cairn Energy. In addition, the government had also withheld tax refunds to Cairn and had recovered more than $1 billion in the process. While Cairn had claimed the amounts with interest and penalty, the government of India had finally agreed to pay the principal amount, which was accepted.

Capricorn Energy PLC, formerly Cairn Energy, has also confirmed the receipt of a net amount of $1.06 billion by the company from the government of India, putting the case to rest. Cairn confirmed that it had already withdrawn all cases, including invoking state properties, in various international courts. The company had already confirmed that more than 70% of the amount received from the Indian government would be distributed to shareholders.

For a quick recap, the Income Tax department had issued a notice to Cairn Energy seeking Rs.10,247 crore as taxes from them for the change in ownership of business assets located in India. In 2006-07, Cairn PLC had reorganised its India business, and later sold majority stake in the India unit to Vedanta Ltd in 2011. In 2014, the IT department slapped the tax demand notice over alleged capital gains tax avoidance as part of the reorganisation.

Back then, Cairn Energy had taken umbrage under the Indo-UK treaty for avoidance double taxation for not paying capital gains taxes in India. However, the Indian government had contested that claim on the grounds that the DTAA was for genuine cases of double taxation and not for cases where the structure was intended to avoid payment of taxes. In the form versus substance debate, it was form that was more legally tenable.

The government of India decided to close the case after Cairn initiating seizure of Indian state overseas assets to recover the refund due. These assets include diplomatic apartments in various countries to planes owned by Air India. As part of the rapprochement, government would refund the principal amount impounded from Cairn and in turn, Cairn would waive off all interest and penalties and also withdraw all legal cases.

India has been one of the most lucrative oil properties for Cairn Energy, especially with the discovery of the Mangala oil field in Rajasthan in January 2004. This was one of the biggest hydrocarbon discoveries in India. Today, the terminal continues to provide more than one-third of India’s crude oil output. Obviously, the stakes were too high from both the sides to let the issue fester any longer.

The Cairn case will act as a precedent to close other similar pending cases of tax avoidance pending against international names like Vodafone, Sanofi, AB InBev etc. More importantly, it positions, the Indian government as being investors friendly and sensitive to the demands of the global investor community. That would be a major advantage as India aggressively scouts for FDI flows for its Make in India program.