The government had lost an international tax case against a UK-based Cairn Energy some time ago and they were asked to pay taxed tp Cairn Energy.

To understand the reason for losing, first we have to understand Retrospective Taxation.

In 2012, the Government of India made some changes to tax laws which gave the IT Department permission to scrutinise mergers & acquisitions going back to 1962 and put forward any tax claims they may find. So, this is essentially what retrospective taxation is, that is, applied in retrospect.

Now, coming to the Cairn Energy case, they discovered oil in the Rajasthan desert first in 1999. Things seemed to be going well and they planned to do an IPO for their India business.

So in 2006, Cairn Energy did an internal rearrangement of their company’s structure. Cairn UK transferred its shares to Cairn India Limited, and there was no tax claim by the Income Tax Department at the time as there were no laws in place.

But the tax rule changed in 2012 and in 2015, the IT Department served Cairn Energy with a tax demand of Rs 10,500 crores on the transfer of shares in 2006-07 which was technically a sale. Hence, there was a capital gain of Rs 24,500 crores, on which tax must be paid.

Since, laws were not there at the time when the deal happened so Cairn challenged it legally. They lost their appeal at the Income Tax Appellate Tribunal (ITAT). But one case regarding the calculation of the capital gains is still pending at the Delhi High Court. 

Meanwhile, to recover the money, the IT dept seized 10% of Cairn India’s shares, which at the time were valued at around $1 billion. The other 90% had been sold to the Vedanta Group in 2011 by Cairn.

Cairn Energy, being a UK company, disputed this under the UK-India Investment Treaty and wanted an international court to decide. They took this matter to the Permanent Court of Arbitration (PCA) at The Hague and the judgement came out in their favour.

The Government of India was asked to pay Cairn Energy $1.2 billion in damages, plus interest and costs.

As the government refused to pay, it affected the image of ease of doing business in India. 

Cairn Energy filed lawsuits in various countries against India, and was looking to seize Indian assets located abroad like diplomat apartments in Paris and Air India planes in the US to recover the money owed to them.

However, the government scrapped the 2012 law recently and agreed to pay Cairn all the damages done in this regard. The entire transaction will be done in the next few days.

Both the parties have come to an agreement and Cairn has decided to drop all the cases against the Indian government as soon as they get $1billion.

The company’s stock jumped 8% in trading in London after the news.

One good thing happened was that when Cairn discovered the largest oil field in India in 2009, the government  managed to collect over USD 18 billion in revenue in 12 years.

Hence, that money can be used to pay back the $1 billion and this case can finally be closed.

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