It's time Centre finds a permanent solution to retro tax disputes

The controversial retrospective taxation issue continues to haunt the central government. Two days ago, the Permanent Court of Arbitration at The Hague delivered a verdict in favour of Cairn Energy Plc in the long-pending retrospective tax dispute and ordered the Indian government to pay up to $1.4 billion to the British energy giant. The arbitration court ruled that the retro levy violated the India-UK Bilateral Investment Treaty.

The dispute dates back to 2015 when the Indian government slapped a tax demand of Rs 10,247 crore on Cairn Energy over alleged capital gains the energy giant made by hiving off its Indian unit into a separate subsidiary for listing on Indian bourses. Cairn Energy went for this internal reorganisation way back in 2006-07 financial year. Subsequently, it sold Cairn India in FY11 to metal major Vedanta Group while retaining a residual five per cent stake in it. The tax authorities, who slapped the tax demand notice on Cairn Energy nearly four years after the sale of its Indian subsidiary, turned aggressive, seized the residual stake, and sold it to recover the retrospective tax dues. The authorities also seized dividends totalling Rs 1,140 crore besides adjusting a tax refund of Rs 1,590 crore against the demand. In the latest ruling, the arbitration court asked the Indian government to pay back all these amounts with interest. That means the central government will have to fork out $1.4 billion, including $200 million in interest costs and $20 million in arbitration costs.

This is not the first time that the central government is on the losing side in a retrospective taxation case. In September this year, the international arbitration court gave a similar ruling in Rs 22,100 crore retrospective tax dispute the Indian government has with telecom major Vodafone. In its ruling, the court said that the tax demand made by the Indian government 'using a retrospective legislation was in breach of the guarantee of fair and equitable treatment' guaranteed under the bilateral investment protection pacts. The Indian government reportedly challenged the verdict in the Singapore court of appeal days before the three-month deadline ended. Interestingly, information about the Centre challenging the verdict in the Vodafone case came out after Cairn announced about arbitration award in its favour. This goes on to indicate that the Centre may challenge the Cairn case verdict also.

However, it's too early to say anything about what will happen in the appeals, but it's better if the central government finds a permanent solution to retrospective tax disputes. Otherwise, such disputes will send wrong signals about India to global investors.