What is the latest on this case?

It is well known that the case pertains to the sale of Cairn India by UK based parent, Cairn Energy, to Vedanta. The company was slapped with a huge tax bill on retrospective basis for dodging the payment of capital gains tax via use of smart structures. Cairn Energy had gone to an independent tribunal which recently ruled against the Indian state citing clauses of the Indo-UK trade treaty. Now, Cairn Energy wants a US court to enforce the tribunal order so that Indian assets like bank accounts, ships and aircraft can be attached. 

Why this case is more complex?

This is not the first such case, as there are similar cases with reference to Nokia and Vodafone too. In the case of Cairn, the Indian government had withheld payments of dividends and tax refunds paid out by Vedanta to Cairn Energy on its residual holding. It is this money that Cairn Energy is looking to recover from the Indian government. While there is a favorable tribunal ruling, Cairn is now trying to get a US court to ratify this tribunal ruling as valid to put pressure on India. The response will be crucial! 

India must persist with its stand

In the case of Vodafone and Cairn, the tribunal has given an order against the Indian government on the grounds that the retrospective tax demand is contrary to the spirit of the Indo-UK tax treaty. That is a very simplistic argument as the treaty is meant to encourage the flow of genuine FDI into the country and not as a vehicle to avoid paying capital gains tax. That is what Vodafone and Cairn Energy have done. They have used a treaty meant to encourage FDI flows into India to create a structure that avoids paying capital gains. Indian government has a point that even with the treaty, the Cairn deal may be FDI in form but not in substance.  

Would it impact FDI flows?

That is a standard threat we have been hearing for a long time. In the case of FDI flows, as long as they create jobs and local output, they can still be given a lot of incentives. But deals like Cairn and Vodafone are a clear attempt to avoid paying tax by hiding behind the veil of legal treaties. Take the case of the Flipkart / Wal–Mart deal. The early stage investors who made profits on the sale of stake in Flipkart were asked to pay out capital gains tax. That is the norm in most countries. If India pursues this case to the logical legal conclusion, it can set a good precedent that India is not meant for tax recycling. Then we can see good quality FDI coming in.