Faced with prospect of its assets across the globe being seized just like Pakistan and Venezuela, the Government decided to scrap retrospective taxation but the international embarrassment could have been avoided had ‘attached’ shares of Britain’s Cairn Energy Plc not been sold, according to tax and legal experts.
On Thursday, the Government introduced a Bill in Parliament to scrap the rule that gave the tax department power to go 50 years back and slap capital gains levies wherever ownership had changed hands overseas but business assets were in India. The 2012 legislation was used to levy a cumulative of Rs 1.10 lakh crore of tax on 17 entities, including UK telecom giant Vodafone, but substantial punitive action was taken only in the case of Cairn.
The income tax department not just sold Cairn’s near 10 per cent shareholding in its erstwhile Indian subsidiary but also seized its dividends totalling Rs 1,140 crore and stopped tax refunds of Rs 1,590 crore.
“The shares the firm held in Cairn India (renamed Vedanta Ltd) were attached by the income tax department soon after it served an initial assessment of Rs 10,247 crore tax demand on Cairn Energy in January 2014.
“Most of these shares were sold within two years of serving a formal tax demand in March 2015,” a leading tax expert said, requesting not to be identified.
The tax department reasoned the decision to the fact that Cairn had begun the process to sell its residual stake in 2014 and the company would have fled the country after that, leaving no avenues to recover the levy.
“But, what is being overlooked is the fact that Cairn couldn’t have sold the shares as they were already attached by the tax department. They would have remained in its possession till the final conclusion of any or all legal processes,” he said.
Once the December 2020 ruling of the international tribunal on the arbitration initiated by Cairn came overturning the levy of taxes on the reorganisation of India business that Cairn carried in 2006 before listing the local unit, “the government could have just released those shares and the matter would have ended,” he said. E-mails sent to the finance ministry as well as the Central Board of Direct Taxes seeking comments remained unanswered. “There is no right or wrong decision. Decisions are bad or good. The share sale decision was a bad one,” another legal expert said.