Retro tax law: What were the liabilities of Vodafone, Cairn Energy

NEW DELHI: The government's proposal to scrap retrospective taxes is said to have a direct bearing on long-running tax disputes with Cairn Energy Plc and Vodafone Group.
It also proposed to nullify tax on indirect transfer of Indian assets before May 2012, on fulfillment of specified conditions, and repay the principle amount without interest thereon.
The proposed amendment comes after a French tribunal last month ordered a freeze on some 20 centrally located properties belonging to the Indian government as part of a guarantee of the amount owed to Cairn.
While the Centre's liability in the Vodafone case is not too significant, it has to refund $1.2 billion to Cairn Energy for the shares of the company it had sold, tax refund withheld and dividends confiscated.
As many as 17 entities stand to benefit from the proposed tax amendment, the government said in Parliament. About Rs 1.10 lakh crore in back taxes was sought from 17 entities that were levied taxes using the 2012 legislation. Of these, major recoveries were made only from Cairn.
Centre said that it will refund about Rs 8,100 crore collected to enforce such levies. Of this, Rs 7,900 crore was from Cairn Energy alone.
What is the retrospective tax law and how did it come into effect
The retro tax law was introduced in 2012 by the then finance minister Pranab Mukherjee to claim tax from international companies which acquired assets of Indian firms.
In 2012, the Supreme Court had ruled that gains arising from indirect transfer of Indian assets are not taxable under extant provisions of the Income tax Act, 1961.
To circumvent this, certain provisions of the Act were amended to introduce the Finance Act, 2012 with retrospective effect.
As per the amendment, gains arising from sale of shares of a foreign company will be taxable in India if such shares, directly or indirectly, derive their value substantially from assets located in India.
Vodafone arbitration award
After the introduction of the Finance Act, in 2013, the tax authorities had slapped Vodafone with a tax demand of Rs 14,200 crore, including principal tax of Rs 7,990 crore and interest but no penalties. In February 2016, it updated the tax demand to Rs 22,100 crore plus interest.
The tax demand was against Vodafone International Holdings BV for its failure to deduct withholding tax from $11.1 billion paid to the Hutchison Telecommunications in 2007 for buying out a its 67 per cent stake in a wholly-owned Cayman Island incorporated subsidiary that indirectly held interests in Vodafone India Ltd.
Tax authorities had then ruled that the deal was done to avoid tax on capital gains in India and hence, imposed a tax. However, the apex court had rejected the tax department's claim back then, which promoted the Centre to make amendments to the Act.
On September 25 last year, an international arbitration court in Singapore had rejected tax authorities' demand for Rs 22,100 crore in back taxes and penalties relating to the British telecom giant's 2007 acquisition of an Indian operator.
The government in December applied in Singapore to set aside the award primarily on jurisdictional grounds.
Vodafone had challenged this tax demand by bringing an arbitration proceeding under the Netherlands-India Bilateral Investment Treaty, which was unanimously ruled in the company's favour.
As per the award, the government had to reimburse Vodafone 60 per cent of its legal costs and half of the 6,000-euros cost borne by Vodafone for appointing an arbitrator on the panel.
The case has now been transferred to a senior court in Singapore and hearings are scheduled to happen in September.
Cairn Energy arbitration award
In March 2015, Cairn Energy -- which gave the country its biggest oil discovery -- was slapped with a demand for Rs 10,247 crore tax on alleged capital gains it made when it reorganised its India business in 2006 before listing of the local unit.
The Scottish firm invested in the oil and gas sector in India in 1994 and a decade later it made a huge oil discovery in Rajasthan. Shares of the firm got listed in the BSE in 2006.
The government then expropriated and liquidated Cairn's remaining shares in the Indian entity, seized dividends and withheld tax refunds to recover a part of the demand.
In December last year, a three-member international arbitration tribunal that consisted of one judge appointed by India unanimously overturned the levy of taxes on Cairn retrospectively and ordered refund of shares sold, dividend confiscated and tax refunds withheld to recover such demand.
The tribunal -- Hague -- had asked India to return $1.2 billion (Rs 8,800 crore) plus interest and cost, to Cairn Energy. The amount totals to $1.725 billion (Rs 12,600 crore) as of December 2020.
Since then, Cairn has been pressing India to pay while the government has looked for possible solutions within the existing framework.
The company has now got the award registered in several registered in countries such as the US, the UK, Canada, Singapore, Mauritius, France and the Netherlands. It has since started seeking enforcement action.
It identified $70 billion of Indian assets overseas for the potential seizure to collect the award, which now totals to $1.72 billion after including interest and penalty.
Last month, Cairn brought a lawsuit in the US District Court for the Southern District of New York pleading that Air India is controlled by the Indian government so much that they are 'alter egos' and the airline should be held liable for the arbitration award.
(With inputs from agencies)