Government To Refund Rs 7,900 Crore Retro Tax To Cairn, Firm To Withdraw Cases

Moving quickly towards ending a retrospective tax dispute with a firm that gave India its largest oilfield, the government has accepted Cairn Energy PLC's undertakings which would allow for the refund of taxes, sources said.

Meeting the requirements of the new legislation that scraps levy of retrospective taxation, the company had earlier this month given required undertakings indemnifying the Indian government against future claims as well as agreeing to drop any legal proceedings anywhere in the world.

The government has now accepted this and issued Cairn a so-called Form-II, committing to refund the tax collected to enforce the retrospective tax demand, two sources with direct knowledge of the development said.

Following the issuance of Form-II, Cairn will now start withdrawing all cases in international courts. Once this is complete, the company will be issued a Rs 7,900 crore refund, they said, adding the withdrawal of cases may take up to three-four weeks.

While a Cairn spokesperson did not immediately respond to requests for comments, a senior finance ministry official confirmed the government accepting the company's undertakings.

Seeking to repair India's damaged reputation as an investment destination, the government in August enacted new legislation to drop Rs 1.1 lakh crore in outstanding claims against multinationals such as telecom group Vodafone, pharmaceuticals company Sanofi and brewer SABMiller, now owned by AB InBev, and Cairn.

About Rs 8,100 crore collected from companies under the scrapped tax provision are to be refunded if the firms agreed to drop outstanding litigation, including claims for interest and penalties. Of this, Rs 7,900 crore is due only to Cairn.

Subsequent to this, the government last month notified rules that when adhered to will lead to the Centre withdrawing tax demands raised using the 2012 retrospective tax law and any tax collected in the enforcement of such demand being paid back.

For this, companies were required to indemnify the Indian government against future claims and withdraw any pending legal proceedings. Cairn on November 3 had stated that it has "entered into undertakings with the Government of India in order to participate in the scheme introduced by recent Indian legislation, the Taxation Laws (Amendment) Bill 2021, allowing the refund of taxes previously collected from Cairn in India."

Cairn's undertaking furnished in Form No.1 under the rule 11UE(1) of the amended law have been accepted by the Principal Commissioner for Income Tax, the sources said. The August legislation cancelled a 2012 policy that gave the tax department power to go back 50 years 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 nearly 98 per cent of the Rs 8,100 crore recovered in enforcing such a demand was only from Cairn. India issued Cairn with tax claims six years ago, and in December 2020 the company won an international arbitration against such demands.

The international arbitration tribunal in December overturned a levy of Rs 10,247 crore in taxes on a 2006 reorganisation of Cairn's India prior to its listing, and asked the Indian government to return the value of shares seized and sold, dividend confiscated and tax refund withheld. This totalled $1.2 billion, plus interest and penalty.

The government initially refused to honour the award, forcing Cairn to identify $70 billion of Indian assets from the US to Singapore to enforce the ruling, including taking flag carrier Air India Ltd to a US court in May. A French court in July paved the way for Cairn to seize real estate belonging to the Indian government in Paris. All these litigations will now be dropped, sources added.