Settle amicably

| Updated on July 09, 2021

A file picture of Cairn Energy Plc's Mangala processing terminal in Rajasthan   -  Bloomberg

Retrospective tax cases should be settled amicably and the provision dropped from the statute

Cairn Energy’s reported move to freeze the Indian government’s properties in France is unfortunate and embarrassing. It follows the Scottish oil company’s move in May to attach assets of Air India in the United States. If anything, these happenings prove that the the fracas between the government and Cairn over the $1.7 billion arbitral award is heading into serious territory. Though India appealed the award given in December last year, asking for it to be set aside, negotiations have been going on between the two parties for an amicable settlement. Cairn’s move is an indication that these negotiations are not going anywhere; indeed, the oil company is turning up the pressure on the government through such well-publicised attachments. While it doesn’t mean that India is in imminent danger of losing ownership over these assets, it causes embarrassment for a country that seeks to project itself as a rising global power. And that is exactly what Cairn wants in its attempt to either get India to pay up on the award or force it into negotiations.

Even as it pursues the appeal against the award, it may be a good idea for the government to engage with Cairn to find an amicable solution. The fact is that the basis of the original tax demand is itself problematic based as it is on a retrospective right to tax. While every sovereign nation has the unquestionable right to tax, such right is always understood to be prospective. Retrospective rights are contestable in law. The dispute pertains to the Cairn Group’s restructuring in 2006-07, and the tax claim was based on the retrospective amendment made to the Income Tax Act in 2012. Given this, the government’s case does appear weak. The retrospective tax cases of Vodafone and Cairn have caused embarrassment and trouble for successive governments in the last nine years and it is time that a conscious decision is made to settle these amicably. It is simply not worth the government’s energy and time spent on pursuing these cases. Putting these behind will also be a source of reassurance for prospective foreign investors which can work to the country’s advantage.

It will be a good idea for the government to also take the decisive step of scrapping retrospective powers under Section 9 through an amendment to the Income Tax Act. While the Modi government has reassured on multiple occasions that it will not invoke the retrospective amendment to make fresh demands, the ultimate proof will be when the mischievous amendment is finally undone. Such a move will also burnish the reformist credentials of the government.

Published on July 09, 2021

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