InvestorQ : What is the Indian government stand on the $1.2 billion demand made by Cairn Energy PLC over retrospective gains made?
Neelam Naik made post

What is the Indian government stand on the $1.2 billion demand made by Cairn Energy PLC over retrospective gains made?

Anu Biswas answered.
8 months ago

Nirmala Sitharaman has clarified that she was duty bound to protect the sovereign right of the Indian government to impose tax on deals in the Indian jurisdiction. Hence they would be appealing against the order by the international tribunal asking the Indian government to pay $1.2 billion to Cairn Energy PLC for partially charging the retrospective tax and withholding their dividends, stocks and tax refunds. This excludes the penalty, if any.

Sitharaman, has clarified that the government will be appealing the $1.2 billion arbitration awarded which it lost against Cairn Energy. Most of these tribunal judgements are not binding upon the sovereign governments unless an Indian court ratifies the tribunal order as valid and binding in the Indian context. Tribunals are not allowed to question any nation’s sovereign right to tax and that is what the current government is contesting in the case.

In such cases, the issue is less of the right to tax and more of providing the proper ecosystem for foreign investors to operate in a country. For example, the British High Commissioner to India, Mr. Alex Ellis, has said in an interview to the media that UK expected Indian government to provide an ecosystem that was conducive to the flow of foreign investments. There are also parallel tier-2 negotiations on to resolve the issue.

However, it would be interesting to see how this case pans out as it would be the final word on the entire issue of retrospective taxation that has been a bone of contention in India. Normally, tribunal orders can be set aside unless it is against public policy or if it is fraudulent in the first place. Also, bilateral treaties between nations are strong and binding enough to make such tribunal orders enforceable.

This is similar to the Vodafone case, which is also being contested in terms of the final order of the international tribunal. The Indian government has already challenged the arbitration tribunal’s verdict that had overturned the Indian government’s demand for Rs.22,100 crore in retrospective taxes from Vodafone Group Plc. Sitharaman has clarified that the impact of such moves on FDI will be limited as India continues to be a magnet for global FDI.