There have been three rounds of high-level negotiations between the Union Finance Ministry and UK oil company Cairn Energy over the settlement of a decade-old case of a tax dispute over the past. In December last year, an tribunal said that the government’s demand violated the bilateral investment treaty of the UK and India and more recently Cairn Energy has initiated a legal process in the US to implement the award. Now the danger is that some of the assets of the Government of India may be confiscated abroad to repay Cairn Energy’s $ 1.2 billion dues. However, the government does not seem ready to back down. Some reports state that it has given Cairn Energy the option that it is willing to pay half of the outstanding amount that would not include interest and penalties. It is also known that the Indian government is considering an appeal against the decision of the tribunal and may ask the Supreme Court to declare that the investment treaty does not apply to tax demands. It seems less a step of a sovereign government and more of an officer who is making every effort.
The only appropriate step for the government would be to completely eliminate the effective tax demand from the past. At the end of last year, the government also had to face defeat in arbitration against Vodafone. In that case the government’s demand for tax applied from a past date violated the bilateral investment treaty with the Netherlands. The government appealed in the Vodafone case and in Cairn’s case it is seen doing the same. But it would be a mistake. Be it Vodafone or Cairn, the time it will take and the effect it will have on the investment environment will prove to be a bigger loss than any financial gain. Since the government has already said repeatedly that it does not believe in effective tax demand from the past like the previous government did. In such a case, its claims of sovereign rights enforcement in the case of tax will only increase confusion and adversely affect the investment environment.
Cairn is not an incredible company. During its business in India, the company was involved in one of the biggest energy discoveries in the country’s recent history. Tax issues have already affected his perception of India and like Vodafone he hardly wants to invest in India. This policy is suicidal for a country struggling for private investment.
The government has given due priority to business ease and tax administration reform. These arbitration decisions should be seen as a legacy of the past, while they were to be overcome in the era of recent business reforms. According to the sentiment that the Prime Minister said in Parliament recently, it would be better to remain reform oriented so that companies investing in the country do not fall behind in such a way that they regret their decision. Demand for tax from past date may be the sovereign right of the country, but there is no doubt that it destroys policy stability and creates fear in investors. The way the government is trying to recover this amount at the moment, all things of business ease appear hollow.