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Firm to continue to press ahead with arbitration challenging new law on the tax, will seek $1 bn in damages
Weeks after being slapped with a Rs 29,000 crore (Rs 290 billion) 'retrospective tax demand', British oil explorer Cairn Energy today said international investors want the Modi government to walk the talk on resolving retrospective tax issues and send a clear signal that things are changing.
Cairn, which gave India its biggest onland oil discovery that now accounts for a fifth of the country's oil production, said it will continue to press ahead with the arbitration challenging use of a new legislation to tax internal business reorganisation with retrospective effect and will seek $1 billion in damages.
"The international investment community wishes to see India doing as it has stated in looking to resolve the retrospective tax issue with actions which would send a positive signal to global investors that things are changing under this current government," Cairn Energy CEO Simon Thomson told PTI in an interview.
The Income-Tax Department in February slapped on Cairn Energy a tax demand notice of over Rs 29,000 crore (Rs 290 billion), including Rs 18,800 crore in back dated interest.
The Department had on January 22, 2014, issued a draft assessment order of Rs 10,247 crore (Rs 102.47 billion) on alleged capital gains the company made in a 2006 reorganisation of its India business. Two years later, it issued a final assessment order.
The actions of the Income Tax Department have been hugely detrimental to Cairn's business and its UK and international shareholders, Thomson said.
"The issuing of a retrospective tax assessment is very disappointing and follows a long period of engagement with the Government of India which has repeatedly given public assurances that it would not resort to retrospective tax measures, introduced by the previous government, given the negative message it sends to the international investment community," he said.
Thomson said Prime Minister Narendra Modi had earlier this year stated that retrospective tax is a matter of the past and he was ensuring that this government and future governments cannot open this chapter.
Modi, he said, had stated that "We have clearly articulated that we will not resort to retrospective taxation and demonstrated this position in a number of ways."
"However, Cairn Energy's outstanding retrospective tax case is yet to be resolved and the matter has been ongoing for more than two years and is having a major detrimental impact on our business and to our UK and international shareholders," Thomson said.
He said the tax issue was a very unfortunate conclusion to a 20 year investment in India where "Cairn Energy has been a model corporate citizen and created a legacy asset which is seen as an example of what can be achieved through India and UK cooperation".
The Rajasthan discoveries generates huge value for India, with revenues of multi-billions for the government, he said.
Asked about the government offer to waive interest and penalty if companies facing retrospective tax demand paid the principal tax due, he said Cairn strongly contests the basis of the tax assessment order supported by detailed legal advice on the strength of the protections available to it under international law.
"As such, Cairn has a high level of confidence in its case under the UK-India Investment Treaty and is seeking to use the international arbitration process in a non-confrontational manner.
"We wish to resolve the issue as swiftly and amicably as possible following a long period of engagement with the government which has repeatedly given public assurances that it would not resort to the retrospective tax measures of the previous government," he said.
Stating that the international arbitration process has begun with the arbitration panel being appointed, he said Cairn welcomes the Indian government's positive engagement in the process.
"We would hope that, like us, the Government of India wants to achieve an outcome as soon as possible in order that this issue is cleared up once and for all.
"The preliminary hearings will take place shortly and the formal process will continue from there. There is no pre-set fixed timetable for the arbitration process but it is unlikely to be less than 12 months," he said.
He said the company has had robust legal advice that the action of the government in seeking to apply tax retrospectively to its internal group reorganisation in 2006 and in freezing Cairn's assets in the country are a breach of the fundamental position of the Treaty which protects against expropriation and ensures a fair and equitable investment environment for British investors in India.
"Cairn is claiming full compensation for the about $1 billion value of which its shareholders have been deprived," he said.
He said one major US investor in Cairn stated that "It is now time for India to send a message to all international investors that retrospective tax is dead and buried once and for all. Many investments needed to finance India's growth will not happen if retrospective laws are possible.
"Repudiating retrospective laws and adopting international norms would allow the international investment community to see that the Modi government is delivering on its pre-election promise to eradicate so called tax terrorism.
Photograph: Reuters