A continuing embarrassment

A French court’s order allowing Cairn Energy to seize 20 Indian assets in Paris, including some luxury flats, to enforce an arbitration award of $1.7 billion is yet another embarrassment for India. The court accepted the company’s claim and froze the country’s assets worth $24 million. The company has already secured court orders in New York to freeze the assets of Air India in the same case. It has been pursuing its claim for many years and the government has persistently refused to accept it. Besides Cairn, Devas Multimedia is also trying to get a $1.3 billion award enforced by seizing Air India’s assets abroad. The dispute with Cairn pertains to the restructuring of the corporate group in 2006-7, which the government claims led to a capital gain of Rs 24,503 crore for the company. The government made a tax claim of Rs 10,247 on that retrospectively in 2012.

Cairn went for international arbitration at the Hague challenging the retrospective tax and won an award of $1.2 billion plus costs. A similar award was given by the International Court of Arbitration at the Hague in favour of Vodafone also. The court ruled that India’s retrospective demand of Rs 22,100 crore for the company on a 2007 deal was in breach of fair and equitable treatment guaranteed by investment treaties. Vodafone had won its case in the Supreme Court also. The government has been refusing to honour the judgements and awards. It has contested them and gone in appeal. The UPA government had brought in the provision for retrospective taxation, but the NDA government is also sticking to it. The BJP, which was in the opposition then, had dubbed it “tax terrorism” but made a volte-face later.

Retrospective taxation is wrong and against the norms of a rational, rule-based tax system. The government’s refusal to accept judicial verdicts is disappointing and does not help to project an image of a country that respects rule of law. It does not help to create an atmosphere conducive to foreign investment. Even domestic investors are deterred. It should also be noted that Cairn had promised to invest the entire amount of the award in India if the government paid up. It is unwise to stand on prestige on matters like these. There will in fact be a real loss of prestige and reputation if the country’s foreign assets are seized to enforce the arbitration awards. These issues should be settled immediately and Section 9 of the Income Tax Act, which provides for retrospective taxation, scrapped.