Context The U.K.-based Cairn Energy is working with the Government of India to expedite “documentation and payment of refund” of $1.06 billion of retrospective taxes.
In its half-yearly report, Cairn said it plans to return $700 million to the shareholders through special dividends and buybacks, out of the expected tax refund from the Indian government.
Recent Amendment to I-T laws by the Indian government
The government recently amended the income tax laws to scrap the retrospective tax provisions introduced in 2012-13, under which Cairn was taxed in 2014 for a corporate restructuring undertaken in 2006-07.
The tax department subsequently froze the firm’s shares as part of the proceedings and sold them off to recover the claimed tax dues.
The changes propose to refund the taxes levied retrospectively if the affected taxpayers drop all pending litigation and forego any interest and damages claims.
Tribunal verdict
An international arbitration tribunal, scrutinising the tax dispute, last year ruled in Cairn’s favour and awarded $1.2 billion in damages to the company. While the government has filed an appeal against the verdict, Cairn has filed lawsuits in several overseas jurisdictions to enforce the tribunal’s award.
Background
The year in reference, 2006-07, was one in which big corporate changes and developments took place in Cairn Energy.
It was the year in which it not only undertook a corporate reorganisation, but also floated an Indian subsidiary, Cairn India, which in early 2007 got listed on the Indian bourses.
Through the corporate reorganisation process, Cairn Energy had transferred all of its India assets, which were until then held by nine subsidiaries in various countries, to the newly-formed Cairn India.
But the tax authorities claimed that in the process of this reorganisation, Cairn Energy had made capital gains worth ₹24,500 crore. This, the department asserted, was the basis of the tax demand of 1.6 billions USD.
In 2011, the U.K.-based Vedanta Resources bought a nearly 60% stake in Cairn India. In fact, four years after this, Cairn India received a tax notice for not withholding tax for the gains ascribed to its former parent company.
