Why has Cairn Seized Indian Government's Assets?
In another episode of Government VS the corporates, we see tax wars, much greed and a lot of lost cases. What's the latest story and why is Government of India losing?
We keep seeing the Income Tax Authorities seizing someone or the other’s properties. Recently, they sold Vijay Mallya’s shares in UBL. But in a turn of tables, Cairn Energy has been inching closer to seize the Indian Government’s assets worth $1.7 billion (approx. Rs. 12,710 crores!)
How did this happen? What’s going on?
Cairn Energy is a big oil and gas exploration company and has a presence across several countries. Now, such big companies carry out operations via several companies that they own in different countries. 15 years ago, in 2006, they made some internal transfers to bring an IPO in India. Here’s what the structure looked like, before and after they made the transactions:
Now all the assets in India, held by the international companies of Cairn were transferred to Cairn India Limited. All of this was done without paying any taxes at all. After all, it was just restructuring, right?
Well, well. The Indian government felt differently. But, that feeling did not dawn upon them immediately.
Around the same time, another such international transaction took place. Here again, no tax was paid! This was Vodafone’s entry into India’s telecom business. An international company of Vodafone had acquired stakes in another international company called Hutchison Essar. It was an international transaction. But ultimately, it was the Indian business that was getting transferred. Yet, no taxes.
By now, the government was like, enough is enough. They asked Vodafone to pay up their tax dues, which Vodafone did not agree to. And the case was dragged to the Supreme Court.
Alas! The government lost the battle. They realized that they had left some loopholes in the law that let the entities get off the hook. Yet, it wasn’t ready to concede. So what did it do?
It changed the law, retrospectively. Meaning, the law would apply to every transaction that has happened since 1962. The changed law roughly states, whichever transactions, be international or within India’s borders, if it involves assets in India, it will be subject to taxation in India.
Using this law, the government saw an opportunity to mint money from Cairn’s case as well.
And so, out of the blue, Cairn was hit with a tax demand of around Rs. 10,247 crores, plus interest. Around that time, Cairn held only about a 10% stake in the Indian entity. Rest had all been transferred to Vedanta.
Now, Cairn refused to comply with retrospective changes in the rule of the game, and the government used all its power to extract its dues from whatever was left of Cairn in India. It did not let Cairn sell the remaining 10% stake. The government sold these stakes to recover the dues. Additionally, all the dividends paid out and the Income refunds that were due to Cairn were lapped up by the government.
And so, Cairn wasn’t left with much choice and it knocked the doors for International Arbitration. To its delight, it won the case. And the Government of India has been asked to pay up for whatever it has seized.
Despite this, the government has refused to budge and is again escalating the issue in Singapore.
Meanwhile, Cairn has also ramped up its recovery process. As per reports, Cairn has seized 20 state-owned properties in France.
It looks like the Indian government is not ready to accept defeat because it might set a dangerous precedence for the future. Or maybe because they will lose face.
Whatever be the case, one thing is for sure: The way the government has been hounding the corporates, it will deter foreign companies from setting up shop in India.
Who will have the last laugh? Maybe the lawyers - on both sides.
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