Contrary to earlier pledges, the Indian government appears to be pursuing retrospective taxation, which could spook foreign investors. N Chandra Mohan reports.

Although India’s National Democratic Alliance government has repeatedly assured the global investor community that it will not resort to retrospective taxation, its income tax department has demanded that any sums due to Cairn Energy Plc from Cairn India Ltd – renamed Vedanta India Ltd (VIL) – must be paid to the government.

This is to settle the larger retrospective tax demand of $1.6bn levied on the company when it transferred its assets to Cairn India Ltd in 2006. The amounts due to Cairn from VIL total $104m, including a historical dividend of $53m and a further dividend of $51m after the merger of Cairn India Ltd and VIL.

Cairn Energy Plc lost an appeal at the income tax appellate tribunal in March, following which a demand note was sent, seeking $1.6bn. The deadline was June 15, failing which recovery proceedings begin. The income tax department first appropriated $232m of past tax refunds due to Cairn, followed by dividends.

Attachment and sale of a residual stake of 10% that Cairn Energy has in VIL is also being contemplated. This tax recovery is taking place although international arbitration proceedings are under way over the retrospective tax demand, and final hearings are scheduled for January 2018. 

Cairn Energy had filed a notice of dispute under the UK-India bilateral investment treaty in March 2015 and international arbitration began in January 2016. Cairn became the first company to experience coercive retrospective tax recovery as India argues that foreign investors must exhaust domestic legal options before choosing international arbitration and that tax matters are not integral to any of its bilateral investment treaties.

India’s 58 bilateral investment treaties were allowed to expire on April 2017 and are expected to be renegotiated in line with its model investment treaty.

The wider implications of the Cairn case concern conditions for doing business in India beyond being an investor/state dispute. The country’s tax environment for attracting FDI does not improve with retrospective taxation remaining on the statute books. Investors need a tax regime that is more transparent and non-adversarial.

India ranks 130 out of 190 economies in the World Bank’s Doing Business indicators for 2017. Cairn, for its part, seeks full restitution for treaty breaches resulting from the expropriation of its investments, the attempts to enforce retrospective tax measures and the failure to treat the company and its investments fairly and equitably. 

This article is sourced from fDi Magazine
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