Selling shares during talks to Panama Papers: The story of Cairn retro tax

Govt last month refunded about Rs 79 bn it collected from selling residual shares of the British firm in its erstwhile India unit, seizing dividend and withholding tax refunds to settle 8 yr dispute

The levy of retrospective tax on the UK's Cairn Energy Plc is a tale of bizarre twists and turns that saw its attached shares being sold in May 2018 amid the passing of the baton from a full-time finance minister to interim one and the talks at the highest level to resolve the dispute, to claims that levy of back taxes was a result of an investigation into Panama Papers leak.

The government late last month refunded about Rs 7,900 crore it had collected from selling residual shares of the British firm in its erstwhile India unit, seizing dividend and withholding tax refunds, to settle an eight-year-old dispute that had tarred the country's reputation as an investment destination.

 

But, this did not come about easily. For seven years, the establishment vehemently justified in courts and outside seeking of Rs 10,247 crore in back taxes plus interest and penalty from a firm that gave India its biggest onshore oil discovery.

Officials even refused to accept a unanimous decision of an international arbitration tribunal, where one judge was appointed by the government, to overturn tax being sought on an internal business reorganisation that Cairn carried out in 2006-07 of its India business prior to listing.

Hawkish officials balked at offers Cairn, which is now known as Capricorn Energy Plc, made to settle the dispute after winning the arbitration award. These offers included reinvesting part of the refund due to it back in the country in a project or sector identified by the government.

A change came about when Finance Minister Nirmala Sitharaman, who had previously delegated the negotiations to her officials, met Cairn executives for the first time at her residence on April 16, 2021.

She was clear that the government wanted to resolve the issue once and for all, three officials with direct knowledge of the affairs said.

Cairn executives, who were to return to London that weekend, were asked to stay back and come for a follow-up meeting with the newly appointed Revenue Secretary Tarun Bajaj, a senior bureaucrat who had previously worked in the Prime Minister's Office (PMO).

Just like his boss, Bajaj also wanted to settle the issue but the ensuing severe second wave of Covid meant no substantive follow-up could happen.

In the meantime, Cairn's marquee shareholders, that included BlackRock, MFS, Franklin Templeton and Fidelity, became impatient and pushed the company board to initiate enforcement proceedings something that saw the company registering the arbitration award in nations from Singapore to the US and Canada and then moving courts in New York and Washington to seize Air India assets.

In July 2021, it succeeded in getting a French court order to freeze the Indian government's residential flats in an upmarket locality in Paris. This then triggered a spate of fresh meetings, and the result was legislation in Parliament in the following month that scrapped all tax demand made using a 2012 law, which gave tax department powers to go back 50 years and slap capital gains levies wherever ownership had changed hands overseas but business assets were in India.

Officials said Bajaj and his team worked at neck break speed thereafter to frame rules, get all legal challenges against the Indian government dropped across the world, secure an indemnity and thereafter refund about Rs 7,900 crore due to Cairn.

This, many in the industry believe, was an unbelievable change in the North Block the seat of the finance ministry.

The tax department had in January 2014 attached Cairn's 9.8 per cent residual stake in Cairn India, a firm it had sold to the Vedanta group in 2011, following slapping an initial tax assessment of Rs 10,247 crore in capital gains tax on 2006-07 reorganisation.

These shares were in its possession but for reasons unexplained, it sold them in May 2018 during the period when then finance minister Arun Jaitley had to step aside to recover from a kidney transplant and the charge of the ministry was given to Piyush Goyal.

The sale came just around the time Cairn executives were in dialogue with officials at the highest level to resolve the dispute.

While 2012 legislation was used to seek as much as Rs 1.1 lakh crore from multinationals such as telecom group Vodafone, pharmaceuticals company Sanofi and brewer SABMiller, now owned by AB InBev, Cairn was the only company against whom substantial recovery proceedings were taken. A total of Rs 8,100 crore was collected as tax using the legislation, of which Rs 7,900 crore was from Cairn alone.

In submissions before the arbitration panel and the courts such as those in the US, the tax department claimed it could not initially discover the capital gains made by Cairn as they were "intentionally camouflaged" by "using a number of artificial financial devices - including, most egregiously, a pair of 'Daylight Loans' to funnel billions of dollars in cash into and then out of India within 24 hours."

It calculated Rs 24,503 crore as the gains made and levied a short-term capital gains tax.

This, it claimed, was detected when it was probing the April 2013 publication of a list of offshore companies and the beneficial owners behind them in the so-called Panama Papers. These papers had the name of a Cairn executive, according to the department's filings.

Industry sources said it would have been much simpler for the government to just release the shares instead of now refunding the money it had collected from the share sale.

Arvind Mayaram, who served as finance secretary during the late years of the UPA and early part of the BJP government, in August last year wrote in an article in a leading daily that then finance minister P Chidambaram was unhappy with the 2012 legislation brought by his predecessor.

After the BJP swept to power in May 2014, he said he had brought up the matter of retrospective taxation with Jaitley the first finance minister of the Modi government.

"Before the elections, the Bharatiya Janata Party and its allies had termed retrospective taxation as 'tax terrorism'. I recommended that scrapping of the amendment could be included in the Finance Bill (as part of the full budget for 2014-15 fiscal)," he wrote.

Jaitley, he said, concurred without reservations, but suggested that this matter be discussed in a meeting with the prime minister.

"In that meeting, there was a lengthy discussion in which I put forward the reasons for amending the 'amendment'. Jaitley strongly supported the arguments. PM Narendra Modi also said he felt that the retrospective tax law had damaged the country's image.

"But, several senior bureaucrats from the PM's Office opposed the finance ministry's proposal vehemently. They put forward the argument that any change would appear that a deal had been made with Vodafone," he said adding that it led to the argument being lost and retrospective taxation remaining.