Although, in Jaitley's defence, the dispute dates back to the time when the Narendra Modi-led NDA government wasn't in power yet and thus the dispute isn't a fresh liability.
India has done it again. After Arun Jaitley, Finance Minister of India, claimed time and again that retrospective taxation will be avoided, the income tax department has snubbed the FM and gone ahead to demand Rs 10,247 crore ($1.6 billion) from Cairn Energy.
Naturally, Cairn Energy is disappointed and so is the investor community as a whole.
In his interim budget speech of 2014, Jaitley had categorically said that India will not randomly resort to retrospective taxation. The aim was to give investors and foreign companies the confidence to come and invest in India.
He had gone ahead to say that the government will not ordinarily bring about any change retrospectively which creates any fresh liability for any company in India.
The Income Tax department, however, has gone ahead and done exactly the opposite.
Although, in Jaitley's defence, the dispute dates back to the time when the Narendra Modi-led NDA government wasn't in power yet and thus the dispute isn't a fresh liability.
Jaitley had repeatedly said that the ongoing arbitration must reach their logical conclusions.
Therefore, there is hope for Cairn Energy.
The case pertains to the capital gains worth Rs 24,503 crore made by Cairn Energy when it transferred its India business from various overseas subsidiaries to Cairn India in 2006.
The IT department claims that Cairn Energy received Rs 26,681 crore from the transfer as against its investment of mere Rs 2178 crore.
The company then raised Rs 8616 crore from retail investors in India through an initial public offering (IPO).
Global metals and mining major, Vedanta Resources, in 2011, bought majority stake in Cairn India from Cairn Energy for a whopping $8.7 billion.
Cairn Energy has said that it has received the draft assessment order from the Income Tax Department. It said, "The draft order addressed to Cairn's subsidiary, Cairn UK Holdings Limited, is in respect of fiscal year 2006-07 to the amount of $1.6 billion plus any applicable interest and penalties," it said."
Cairn has directed its lawyers to appeal under the terms of UK-India Investment Treaty. This means that Cairn Energy and the Indian government will now negotiate to find a solution to the tax demand. However, if a satisfactory resolution is not reached, the case will be sent to an international arbitration panel whose order would be binding on both.
In January this year, the Indian government had decided to walk its talk and not appeal against the high court order in Rs 3200 crore Vodafone tax case.
At that time, Assocham Secretary General D S Rawat had said, "It will lead to a big lift in sentiment among global investors."
It remains to be seen whether the IT department's tax slap on Cairn will dampen those investor sentiments or whether Jaitley will move quickly to soothen them.
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