With the Indian government paying compensation to Cairn, is the tax dispute over?

It looks like the dispute has been put to rest with the government paying Rs.7,900 crore to Cairn as compensation for the shares sold and tax refunds withheld. By the way, Capricorn Energy is the new name of Cairn Energy which, had an Indian subsidiary Cairn India, now a part of Anil Agarwal’s Vedanta group. The allegation at the root of this debate was that Cairn had resorted smart structures purely to evade taxes and nothing else.

The dispute was stirred up by the IT department based on the Retrospective Taxation Bill of 2012. That bill has now been interred. Under the provisions of retrospective taxation, the Income Tax department had made a demand on Cairn India to pay up Rs.10,247 crore. As compensation, the government had withheld the refunds to Cairn of tax and also sold the shares of Vedanta in their demat account to partially recover the tax impost.

Now Capricorn Energy has confirmed the receipt of a net amount of $1.06 billion from the government of India. This virtually puts the case to rest. Capricorn Energy had already confirmed that more than 70% of the amount received from the Indian government would be distributed as a special dividend to the shareholders. Back then, Cairn had taken umbrage in the Indo-UK treaty and eventually it was a victory of form over substance.

The government of India opted to close the case after Cairn initiated seizure proceedings against overseas Indian assets. These included diplomatic apartments in various countries as well as planes owned by Air India. With the rapprochement done, Cairn has waived off all interest and penalty demands and also withdrawn all legal cases against the government across the globe. The stakes were too high for both parties to give up on the relationship.