The filing of a case by Cairn Energy in a US court for seizure of the assets of government-owned Air India to recover dues of $1.2 billion that India owes it after losing a tax arbitration award by the Permanent Court of Arbitration in The Hague in December last year has again put the focus on India’s controversial retrospective tax policy. Worse, it holds the prospect of damaging the country’s reputation at the international level in many respects. The Cairn case shows the country not only as sticking to a wrong and irrational tax policy but also as refusing to honour international awards. The case relates to a financial transaction made in 2007, when Cairn Energy transferred its assets in India to a company incorporated in the country. Tax authorities claimed that it had resulted in capital gains for the British company and made a tax demand in 2015. This was similar to the Vodafone case, which also involved a retrospective levy. In both cases, the government has challenged arbitration judgements -- in Singapore in the Vodafone case and in the Dutch court of appeals in the Cairn case.
Cairn has moved courts in other countries also, including the UK and the Netherlands, to get the award enforced and to recover the money. Apart from Air India, the company is said to have identified other assets owned by the Indian government or its entities, including ships owned by the Shipping Corporation of India and the properties of public sector banks operating in some countries. If the company succeeds in its efforts, India will be in the company of countries like Pakistan and the Republic of Congo who had their assets seized after failing to meet international obligations. The government should consider whether it wants to subject the country to such humiliation.
The government does not seem ready to relent. It has maintained that its sovereign right of taxation goes beyond the scope and jurisdiction of international awards. But the courts in India and the international tribunals have not disputed this. They have only held that India’s actions were violative of the ‘fair and equitable treatment’ guaranteed to foreign investors under relevant bilateral investment protection treaties. The government’s stand will not only hurt the country’s image but also affect its standing as a place where the rule of law holds. The government’s disinvestment plans will also be affected. Following Cairn’s move, Vodafone and Devas Multimedia may also consider launching similar processes for the seizure of India’s assets abroad. The BJP had criticised the UPA government’s retrospective tax legislation as “tax terrorism.’’ What is it doing now?