Selling stocks during the Panama Papers talks: the story of the Cairn retrotax
The levy of a retrospective tax on Cairn Energy Plc in the UK is a tale of bizarre twists that saw its attached shares sold in May 2018 amid the handover from full-time finance minister to minister interim and talks at the highest level to resolve the dispute, to allegations that the collection of back taxes was the result of an investigation into the leak of the Panama Papers.
At the end of last month, the government refunded about 7,900 crore rupees it had raised by selling residual shares of the British company in its former Indian unit, seizing dividend and withholding tax refunds, to settle an eight-year dispute that had tarnished the country’s reputation as an investment destination.
But it didn’t come easily. For seven years, the establishment has vehemently justified in court and outside the demand for Rs 10,247 crore in back taxes plus interest and penalties from a company that has given India its biggest discovery of oil onshore.
Officials even refused to accept a unanimous decision by an international arbitration tribunal, where a judge was appointed by the government, to cancel the tax sought on an internal business reorganization that Cairn carried out in 2006-07 from its activity in India prior to listing.
Falcon officials balked at offers from Cairn, which is now known as Capricorn Energy Plc, made to settle the dispute after winning the arbitration award. These offers included the reinvestment of part of the reimbursement owed to him in the country in a project or sector identified by the government.
A change came when Finance Minister Nirmala Sitharaman, who had previously delegated the negotiations to her officials, met Cairn leaders for the first time at her residence on April 16, 2021.
She made it clear that the government wanted to resolve the issue once and for all, said three officials with direct knowledge of the cases.
Cairn leaders, who were due to return to London this weekend, were asked to stay back and come for a follow-up meeting with new revenue secretary Tarun Bajaj, a senior civil servant who had previously worked in the office of the Prime Minister (PMO).
Much like his boss, Bajaj also wanted to address the issue, but the ensuing severe second wave of Covid meant no substantial follow-up could take place.
Meanwhile, Cairn’s marquee shareholders, which included BlackRock, MFS, Franklin Templeton and Fidelity, grew impatient and pushed the company’s board to initiate enforcement proceedings, which saw the company register the arbitration award in countries ranging from Singapore to the United States and Canada, then move the courts to New York and Washington to seize Air India’s assets.
In July 2021, he successfully secured a French court order to freeze Indian government residential apartments in an upmarket Paris locale. This then sparked a series of further meetings, and the result was legislation in parliament the following month that removed any tax claim made using a 2012 law, which gave the tax department the power to go back 50 years in back and impose capital gains levies wherever ownership had changed. hands overseas, but the company’s assets were in India.
Officials said Bajaj and his team worked at full speed thereafter to frame the rules, get all legal challenges against the Indian government across the world dropped, secure compensation and then repay around Rs 7,900 crore owed to Cairn.
This, according to many industry players, was an incredible change in the North Block, home of the Ministry of Finance.
The tax department had in January 2014 attached Cairn’s residual 9.8% stake in Cairn India, a business it had sold to Vedanta Group in 2011, after imposing an initial tax assessment of Rs 10,247 crore in capital gains tax on the 2006-07 reorganization.
These shares were in his possession but for unexplained reasons he sold them in May 2018 during the period when then Finance Minister Arun Jaitley had to step down to recover from a kidney transplant and the charge of the ministry was entrusted to Piyush Goyal.
The sale came just as Cairn executives were talking with officials at the highest level to resolve the dispute.
While the 2012 legislation was used to seek up to Rs 1.1 lakh crore from multinationals such as telecommunications group Vodafone, pharmaceutical company Sanofi and brewer SABMiller, now owned by AB InBev, Cairn was the only company against which substantial recovery proceedings have been initiated. A total of Rs 8,100 crore was levied as tax using the legislation, of which Rs 7,900 crore came from Cairn alone.
In submissions to the arbitration panel and courts such as those in the United States, the tax department claimed that it could not initially discover the capital gains realized by Cairn because they were “intentionally camouflaged” in “using a number of artificial financial devices – including, most egregiously, a pair of ‘Daylight Loans’ to funnel billions of dollars in cash to and from India within 24 hours.”
He calculated Rs 24,503 crore as the realized gains and levied a short-term capital gains tax.
This, he claimed, was detected when he was investigating the publication in April 2013 of a list of offshore companies and the beneficial owners behind them in the so-called Panama Papers. Those papers bore the name of a Cairn leader, according to departmental documents.
Industry sources said it would have been much simpler for the government to just release the shares instead of now returning the money it raised when the shares were sold.
Arvind Mayaram, who served as finance secretary during the last years of the UPA and the beginning of the BJP government, wrote in August last year in an article in a major daily that the finance minister of At the time, P Chidambaram was unhappy with the 2012 legislation brought in by his predecessor.
After the BJP came to power in May 2014, he said he raised the issue of retrospective taxation with Jaitley, the first finance minister in the Modi government.
“Before the elections, the Bharatiya Janata Party and its allies had called the retroactive taxation “fiscal terrorism”. I recommended that removal of the amendment be included in the Finance Bill (as part of the budget complete for fiscal year 2014-15),” he wrote.
Jaitley, he said, agreed wholeheartedly, but suggested the matter be discussed at a meeting with the prime minister.
“At this meeting, there was a long discussion during which I put forward the reasons for amending the ‘amendment’. Jaitley strongly supported the arguments. Prime Minister Narendra Modi also said he believed that the retrospective tax law had damaged the image of the country.
“But several senior officials in the Prime Minister’s Office vehemently opposed the Finance Ministry’s proposal. They made the argument that any change would give the impression that a deal had been struck with Vodafone,” he said. he said, adding that it led to the loss of the argument and hindsight. remaining tax.
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