Cairn, Vodafone Wins Make India Scrap ‘Nightmare’ Tax
India will scrap a tax rule that triggered billions of dollars of arbitration battles with companies including Vodafone and Cairn.
(Bloomberg) -- India will scrap a tax rule that triggered billions of dollars of arbitration battles with global companies including Vodafone Group Plc and Cairn Energy Plc, spooked potential overseas investors and dented the reputation of Asia’s third-largest economy.
A bill to abolish the rule -- which gave Indian tax officials power to go after M&A deals all the way back to 1962 if the underlying asset was in India -- was approved by the lower house of Parliament on Friday. The proposal, which will allow firms relief from tax demands after they drop pending litigation and forgo damages or interest, needs to be cleared by the upper house, a largely procedural move.
The move opens room for a settlement with firms seeking to seize Indian state-owned properties abroad after international arbitration ruled in their favor. The 2012 law had led to disputes that tarnished India’s image as a business-friendly destination, and the placatory action comes as Prime Minister Narendra Modi tries to lure investors into an economy battered by the pandemic.
“The country today stands at a juncture when quick recovery of the economy after the Covid-19 pandemic is the need of the hour,” according to the bill laid in the house Thursday. “Foreign investment has an important role to play in promoting faster economic growth and employment.”
Cairn said it’s “monitoring the situation,” while shares of the oil producer opened higher after jumping as much as 47% Thursday. Vodafone declined to comment.
The U.K. oil explorer received the tax claim from Indian authorities in March 2015 over a restructuring carried out in 2006, while preparing for an initial public offering of Cairn India. Last year, an international arbitration ordered India to return $1.2 billion plus interest. Cairn initiated proceedings in numerous locations globally to enforce the ruling, including taking flag carrier Air India Ltd. to a U.S. court in May. A French court last month paved the way for Cairn to seize real estate belonging to the Indian government in Paris.
New Delhi was also battling litigation from Vodafone, which had challenged a 200 billion-rupee ($2.7 billion) claim in past taxes. India was trying to levy capital gains tax on the company’s 2007 acquisition of the then Hutchison Whampoa Ltd.’s Indian operations. An international arbitration tribunal ruled last year that India’s move was a breach of fair treatment under the bilateral investment protection pact between the South Asian nation and the Netherlands.
The government had in 2012 decided to tax retrospective deals to shore up its coffers after a slowdown had sapped revenues, leaving the economy with a yawning budget deficit -- then the widest among the biggest emerging markets.
No tax will be imposed on any indirect transfer of assets if the transaction was undertaken before May 28, 2012, according to the bill tabled in Indian parliament Thursday. India is likely to return 80 billion rupees collected from companies as back taxes, according to a government official, who asked not to be identified citing rules.
“It’s a welcome move because it will encourage foreign companies, who have had a nightmare with the government in the past and have spent heavily on legal costs,” said Sonam Chandwani, managing partner at KS Legal & Associates. “It had been a protracted battle between Vodafone, Cairn, and the union government, and the government faced a major defeat against the behemoths.”
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