The Capricorn tax story

Cairn Energy recently changed its name to Capricorn Energy. The Cairn dispute pertains to reorganization of the Cairn India business back in 2006. Back then, Income Tax department had pointed out that Cairn Energy PLC had deliberately created a structure to avoid paying taxes to Indian government. However, there was no enabling provision for the Income Tax department at that point of time. It came as the Retrospective Tax Amendment in the 2012 Union Budget? With the new law passed in 2012, the Income Tax department could open past cases up to 50 years. The first thing they did was to reopen the Cairn case and impose tax of Rs.10,247 crore on the transaction. Even as the case was being fought, the ITD confiscated and sold shares of Vedanta and also held back tax refunds, recovering Rs.7,900 crore in the process. It is this amount, withheld by Indian government, that was the subject of dispute. Cairn had already approached international courts to take possession of state assets like Air India planes and diplomatic homes in other countries to recover their dues. 

Now for the bigger learnings

Even as the biggest tax dispute of Cairn India is resolved, it leaves behind 3 very important learnings for India. First, legal contracts and processes and protocols in India have to be up to international benchmarks. Secondly, tax policy has to be consistent. At a time, when India is aggressively scouting for foreign flows in the form of FDI investments, a more stable tax regime holds the key. Thirdly, global contracts and agreements run on what is agreed on paper. There is a lot of accent on documentation and written word. India has to play by these rules. Above all, it is clear that given a dispute between form and substance, in the global legal sweepstakes, it is form that will have the upper hand in arbitration. 

Time to focus on FDI

With the Cairn tax dispute out of the way, the next step is to bring the focus back to FDI flows. India has seen record FDI flows in the last few years, but a lot of that money went into digital stories. That will continue on its own merits. What the government needs to focus on is getting FDI in areas like automobiles, electronic equipment, textiles, chemicals etc. That is the thrust of Atma Nirbhar Bharat and these sectors are also very large job creators. With a more stable regime and predictable tax policy, FDI should find India a lot more attractive. It is now time for Indian government to actually strike when the iron is hot!