GS PAPER II: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Context: Cairn Energy is suing Air India in New York to seize its assets to enforce the $1.2 billion arbitration award it won against the Indian government in a retrospective tax dispute.

What is the Cairn Energy-Air India dispute about?

• A three-member international arbitral tribunal had ruled in a verdict that the Indian government has breached the guarantee of fair and equitable treatment” which was against the India-UK bilateral treaty.
• It awarded Cairn $1.2 billion in compensation that India was liable to pay.
• Meanwhile, India has also challenged the arbitration award in Netherlands.

What is the retrospective tax demand?

• The arbitration was initiated by Cairn, similar to what Vodafone did for a breach relating to India’s 2012 retrospective amendments to tax laws.
• In 2006, Cairn Energy made a bid to consolidate its Indian assets under a holding company — Cairn India Limited.
• As part of that internal rearrangement, Cairn UK transferred shares from non-Indian companies to an Indian holding company.
• Between 2009 and 2011, Cairn UK was not allowed to transfer its 9.8 per cent stake in Cairn India to Vedanta.
• Tax authorities in India said in the 2006 transactions, the share transfers attracted capital gains tax of over Rs 6,000 crore by Cairn UK.
• In 2012, following the Supreme Court ruling Section 2(14) of the Income Tax Act, the government amended the law retrospectively.
• The 2012 amendment clarified that “an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.

What is retrospective taxation?

• It 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.
• 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.

What is the Bilateral Investment Treaty?

• On November 6, 1995, India and the Netherlands had signed a BIT for promotion and protection of investment by companies of each country in the other’s jurisdiction.
• The treaty had then stated that both countries would strive to “encourage and promote favourable conditions for investors” of the other country.
• The two countries would, under the BIT, ensure that companies present in each other’s jurisdictions would be “at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other”.
• The BIT between India and the Netherlands expired on September 22, 2016.

https://indianexpress.com/article/explained/cairn-energy-air-india-dispute-explained-7319804/

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