India and Cairn Energy Dispute - Daily Current Affair Article

Reference

The Indian government has suffered defeat in the Permanent Court of Arbitration in a tax dispute with Cairn Energy.

Introduction

The Cairn Energy Institute filed a lawsuit against the Government of India in the Permanent Court of Arbitration. The Permanent Court of Arbitration pronounced the judgment in favor of Cairn Energy, saying that the demand of the tax to be made by the Government of India is unreasonable. Earlier, the Indian government recently lost a lawsuit with the Vodafone Group. Thus, this is India's second tax defeat in the International Court of Justice.

What was the dispute?

  • The Government of India introduced the retrospective tax in the budget of 2012, under which it has been made mandatory to pay tax on M&A if the assets of any company after 1962 are in India.
  • In 2006-07, Cairn UK Holdings, a wholly-owned subsidiary of Cairn Energy, earned a capital gain of over Rs 24,000 crore from the public listing of Cairn India. Thus an internal restructuring was done in 2006 by Cairn Energy.
  • In 2011, the remaining shares were sold to Vedanta Group leaving a 9.8% stake in Cairn India. The sale of the remaining stake was stayed by the Income Tax Department and the dividend payment to Cairn Energy was also frozen by Cairn India. It was stated by GOI that Cairn Group is deliberately avoiding tax.
  • After the retrospective tax in 2012, the Government of India levied a tax of Rs 10247 crore on the internal restructuring of Cairn Energy.
  • The charge of this tax accused the Indian government of violating the rules of the Bilateral Investment Protection Treaty with Britain. And the Government of India was unable to give investment fair and equitable treatment to Cairn Energy.
  • Cairn filed a formal lawsuit in March 2015 against the demand of over $ 1.4 billion by the Tax Department of India, whose decision has come against the Indian government.

Key points of decision

  • Although the taxation is determined by the sovereign state, the matter was related to tax as well as investment, and hence it was heard in the Permanent Court of Arbitration. Along with this, India was hearing a case of violation of the rules of the bilateral investment protection treaty with Britain.
  • The Hague-based Permanent Court of Arbitration, while hearing the case, decided that the retrospective tax effect alleged by the Government of India is unfair.
  • The International Court has ordered that the Government of India will give 8000 crore rupees as compensation to Cairn Energy. With this, the Government of India will withdraw the order of 1.4$ Billion imposed by Cairn Energy.

Impact of decision

  • This is the second defeat to the Government of India in the last 3 months. Earlier, in the case of Vodafone Group, a decision was taken against the Government of India, in the case of Cairn Energy, the government will also have to pay a compensation of 8000 crores.
  • Thus the government will suffer an economic loss when the economy is not running smoothly at this time.
  • Somewhere in India the investment and business environment will be affected by this dispute, foreign companies will not want to invest in India.
  • Such disputes will cause a decline in India's rank in the Ease of Doing Business index.
  • There will be obstacles in the path of India becoming an economic superpower.

Permanent Court of Arbitration

  • It was established in 1899 under the Convention for Pacific Settlement of International Disputes.
  • Its headquarters is located in The Hague.
  • Although it was established to settle a dispute between two sovereign countries, today it plays a decisive role in international disputes on various subjects.

The conclusion

Although the Government of India can appeal against this decision, if desired but it will harm the environment of investment in India somewhere and the amount of investment in India will decrease. At the same time, the retrospective tax effect will create an uncertain environment in the country. Currently, India needs investment to boost its growth and economic growth. Therefore, the government should accept this decision to keep up with international arrangements.

General Studies Paper 2 and 3
  • International Relations and Economy

Mains Question:-

  • In a recent tax dispute with Cairn Energy, the International Court of Justice has ruled against the Government of India. Review the decision of the International Court of Justice and describe its impact on India.