In its letter, Cairn has also sought clarity on the PM's statement in London last month that the government will not resort to retrospective taxation and "has demonstrated the position in a number of ways". The demonstration effect is obviously lost on Cairn as the company has got no remedy, and endured a $1-billion loss in value, forcing it to sell assets, postpone investment and cut workforce by 40 per cent. While Cairn has denied any tax was due even if the retrospective amendments to the Income Tax Act were applied, as its group reorganisation had not resulted in any real income accruing to it, the income tax (I-T) department has stuck to its stand that Cairn made a capital gain of Rs 24,503.50 crore in 2006 while transferring all its India assets to a new company, Cairn India, and getting it listed on the stock exchanges. Cairn Energy, which had in 2011 sold a majority stake in its Indian unit to mining group Vedanta for $8.67 billion, still holds 9.8 per cent stake in Cairn India, but it has been barred by the I-T department from selling this stake. What makes the matter curious is that Cairn had fully disclosed the details of its internal reorganisation in its application to the Foreign Investment Promotion Board in August 2006, a copy of which was sent to the I-T authorities. The company also disclosed the details of the deal directly to the I-T department in its tax filings for the assessment year 2007-2008. Again, the I-T department made no demand for capital gains tax. So it is difficult to explain how fresh tax obligations have been applied to these transactions over seven years after the government had fully approved them.
While Cairn is just one example, the larger point is that there are widely accepted principles of taxation that question the logic of levying capital gains tax on the kind of transactions that took place in the case of Cairn Energy. Also, no amount of claims on the ease of doing business or relaxation of foreign direct investment norms or Make-in-India promises would be able to neutralise the government's continued dithering on the issue of retrospective taxation. The PM has denounced the previous government's "tax terrorism" - imposing unreasonable taxes on foreign investors - in his public meetings all over the world. That raised hopes of transparency and predictability in the Indian business environment and no sudden lurches in the way tax policy is interpreted - like in the case of Vodafone, Cairn and a host of others. It's time the government took some concrete action on those promises. Just claiming in packed auditoriums that the ghost of retrospective taxation has been buried lacks credibility when two of the biggest such cases are still pending resolution.