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Cairn UK – Retrospective taxation dispute case

tax

UPSC CSE – SYLLABUS – GS – 3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Cairn UK – Retrospective taxation dispute case

Retrospective taxation:

  • As the name suggests, retrospective taxation allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.
  • Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
  • While governments often use a retrospective amendment to taxation laws to “clarify” existing laws, it ends up hurting companies that had knowingly or unknowingly interpreted the tax rules differently.
  • Apart from India, many countries including the US, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies, which had taken the benefit of loopholes in the previous law.

What is the dispute all about?

  •  Like Vodafone, this dispute between the Indian government and Cairn also relates to retrospective taxation.
  • In 2006-07, as a part of internal rearrangement, Cairn UK transferred shares of Cairn India Holdings to Cairn India.
  • The Income Tax authorities then contented that Cairn UK had made capital gains and slapped it with a tax demand of Rs 24,500 crore.
  • Owing to different interpretations of capital gains, the company refused to pay the tax, which prompted cases being filed at the Income Tax Appellate Tribunal (ITAT) and the High Court.
  • While Cairn had lost the case at ITAT, a case on the valuation of capital gains is still pending before the Delhi High court.
  • In 2011, Cairn Energy sold majority of its India business, Cairn India, to mining conglomerate Vedanta.
  • Cairn UK was however not allowed to sell a minor stake of about 10 per cent by the income tax authorities.
  • Authorities had also siezed Cairn India shares as well as dividends that the company paid to its parent UK firm.

Arbitration courts verdict:

  • In its judgment, the Permanent Court of Arbitration at The Hague said Cairn Tax Issue was not just a tax related issue but an investment related dispute, and therefore under the jurisdiction of the international arbitration court.
  • Akin to the ruling in the Vodafone arbitration case, the PCA at The Hague has once again ruled that the Indian government’s retrospective demand was “in breach of the guarantee of fair and equitable treatment”.
  • It has noted that Cairn UK’s argument that the demand on them was made after the Vodafone retrospective tax demand, which has since been set aside by Indian courts.

Source: ” Indian Express”.

POSSIBLE UPSC MAINS EXAMINATION:

What is the retrospective taxation Cairn dispute case all about? What should be the course forward for India?