Cairn, govt discuss LTCG tax and Vivad se Vishwas scheme

Cairn desires a fast answer to its tax dispute to keep away from prolonging and exacerbating the unfavorable situation.

During a sequence of hectic talks between Cairn Energy and the Indian authorities over the $1.2-billion arbitration award in favour of the previous final week, a slew of choices was proposed by the 2 sides, together with computation of capital good points and participation within the Vivad se Vishwas (VsV) dispute decision scheme.

The authorities is prone to go forward and attraction towards the arbitration award by a Permanent Court of Arbitration at The Hague earlier than March 21, indicated finance ministry officers.


Cairn Energy Plc on Sunday mentioned it was hopeful that a suitable answer to its tax dispute with the Indian authorities might be discovered to keep away from prolonging and exacerbating the ‘negative issue’ for all events.

The firm mentioned it was clear it ought to proceed to take all needed steps to guard the pursuits of its shareholders.

The vitality main is learnt to have raised considerations over the tax computation of the 2006-07 deal, which it felt ought to have been computed on a long-term capital good points (LTCG) foundation as an alternative of short-term capital good points (STCG), leading to a tax legal responsibility of Rs 1,800-2,000 crore, as an alternative of the Rs 10,500-crore tax demand.

The authorities has emphasised that whereas it welcomed Cairn’s transfer to succeed in out for a decision, any dispute decision to be sought by Cairn should be inside already current legal guidelines.

Sources identified that Cairn invested in India in 1998 and exited in 2006-07, which might have attracted LTCG on the price of 10 per cent or 20 per cent, together with indexation.

However, with a purpose to circumvent this legal responsibility, Cairn created layers of subsidiary corporations in reorganising its India enterprise by way of the creation of Cairn UK Holdings (CUHL) in 2006, however ended up attracting STCG tax.

Cairn had earlier raised this in its argument on the income-tax appellate tribunal (ITAT), which it subsequently misplaced.

The answer might lie in re-computing the tax demand on LTCG foundation, knowledgeable a supply.

“Notwithstanding and with out prejudice to our rights underneath the worldwide arbitration award, we’ve mentioned quite a lot of proposals with the purpose of discovering a swift decision that might be mutually acceptable to the Govern­ment of India and the pursuits of Cairn’s shareholders.

“Assu­ming such a decision will be achieved, we sit up for having the ability to transfer on to additional alternatives to put money into India, which continues to import a majority of the vitality sources it consumes,” mentioned Cairn Energy in a press release.

The Government of India, on its half, requested it to return underneath the VsV scheme — the window for which is open until February 28 after 4 extensions.

The scheme offers for settlement of disputed tax, disputed curiosity, disputed penalty or disputed price in relation to an evaluation or reassessment order on cost of 100 per cent of the disputed tax and 25 per cent of the disputed penalty or curiosity or price.

The taxpayer is granted immunity from levy of curiosity, penalty, and establishment of any continuing for prosecution of any offence underneath the I-T Act in respect of issues coated within the declaration.

In truth, in 2016 the federal government had provided Cairn Energy settlement of the retrospective tax dispute by way of its one-time tax dispute decision scheme, which offered for waiving curiosity and penalties if the principal quantity was paid.

“The most cheap answer for Cairn can be to take part within the VsV scheme.

“The window continues to be open. They can come and declare underneath the scheme,” mentioned a authorities official.

The firm, nevertheless, has prior to now dominated out co­ming in as a part of this scheme.

The case pertains to the Rs 24,500-crore tax demand on capital good points made by the oil main in reorganising its India enterprise in 2006-07.

The Indian authorities had misplaced a global arbitration case to vitality big Cairn Plc underneath the retrospective tax laws modification in a verdict on December 21.

The agency mentioned the freezing of its belongings in 2014 to implement a retrospective tax measure had been extraordinarily unfavorable for all events, and that it was “very keen to be able to put this legacy matter behind and move forward positively”.

An worldwide arbitration seated at The Hague and constituted underneath the phrases of the UK-India bilateral funding treaty (BIT) has dominated conclusively on the matter and issued a ultimate and binding award in Cairn’s favour, ordering the refund of the worth of the belongings taken, being $1.2 billion, plus vital curiosity and prices, famous the corporate.

“That arbitration additionally dominated decisively that this matter falls inside the jurisdiction of the UK-India treaty, having heard arguments from the events on that topic.

“We have had cordial and constructive discussions in Delhi over the previous few days with officers from the ministry of finance,” it added.

Cairn mentioned it loved a protracted and profitable historical past working in India, investing billions of {dollars} and the enterprise it created in India has generated greater than $20 billion in income for the federal government.

On June 26, 2006, Cairn first created CUHL and transferred the Indian belongings to it. In retu­rn, it bought 221.44 million shares of CUHL on June 30, 2006.

It bought one other 29.78 million shar­es on the market of £29.78-million debt on September 1, 2006.

The tax division took a view that STCG tax ought to apply, given CUHL had acquired 251.22 million shares of Cairn India Holdings at the price of £251.22 million in August-September 2006.

The identical was then bought to the newly created Cairn India inside a couple of months.

The STCG of Rs 24,503 crore on the hand of CUHL was confirmed by the ITAT in March, following which a requirement be aware was despatched, searching for Rs 10,247 crore.

While each side hardened their stand, with Cairn Energy submitting for enforcement of the December arbitration award towards the Indian authorities, India’s income division has been readying to file an attraction towards the award.

It is prone to file an attraction at The Hague by March 10 and is in talks with senior Dutch legal professionals.

New Delhi has time until March 21 to file an attraction in accordance with the 90-day window.

The award will probably be contested on two key grounds — jurisdiction and worldwide public coverage.

Cairn Energy Plc’s chief govt officer Simon Thomson had, nevertheless, in a video message expressed willingness to fulfill Finance Minister Nirmala Sitharaman, however she handed it on to finance secre­tary Ajay Bhushan Pandey.

Cairn Energy has filed a case in a US district court docket to implement the arbitration award.

Earlier, the Edinburgh-based firm had filed the same case in a Dutch court docket.

In the attraction, India is anticipated to take a stand that the federal government has the sovereign proper of taxation and personal people can’t resolve on that.

According to the Centre, the award falls outdoors the area of BIT and past the jurisdiction of worldwide arbitration.

Also, the federal government is prone to invoke worldwide public coverage, arguing that Cairn didn’t pay tax in any jurisdiction throughout the globe.

Photograph: Parth Sanyal/Reuters

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