[‘Daily News Updates’ will provide you with a simplified understanding of the important economic/financial events across the country]
What is the Cairn v. India dispute? What are the recent developments?
In 2006, Cairn Energy, a UK-based company, consolidated its Indian assets through an internal restructuring. As part of the arrangement, Cairn UK transferred all its assets in India to a new company named Cairn India. “Subsequently, Cairn India then divested roughly 30 percent of its shares through an Initial Public Offering. Between 2009 and 2011, mining conglomerate Vedanta Plc acquired most of Cairn Energy, but Cairn UK was not allowed to transfer its 9.8 percent stake in Cairn India to Vedanta.” As per the tax authorities in India, the share transfers in 2006 attracted a capital gains tax of over 6,000 crore rupees by Cairn UK, which it failed to pay. At the same time, the Vodafone tax dispute arose.
[Read- UNDERSTANDING GENERAL ANTI-AVOIDANCE RULE (GAAR). Vodafone had entered the Indian market in 2007 by purchasing Hutch India at Rs.55000 crores. Hutchinson Hongkong (the parent company of Hutch India) sold Hutch India to Vodafone and hence was liable to pay capital gains tax to Indian tax authorities.
As per the Indian tax law, Vodafone should have deducted the amount of capital gains tax from the final payment made to HTL Hongkong and deposited it with the tax authorities.
But it did not turn out that way. This is because HTL Hongkong did not invest directly in India. They invested through an intermediary in the Cayman Islands called CGP Investments (Holdings) Ltd., which owned 67% in Hutch, India. So, Vodafone purchased CGP investments. It effectively made them the owner of Hutch Essar, India.
Vodafone refused to pay capital gains tax in India as it was a transaction carried out in the Cayman Islands between two foreign firms. (The Cayman Islands is a tax haven and imposes no capital gains tax on the sale of assets.)
The tax authorities argued that the transaction involved the sale of Indian assets and was liable to be taxed in India.
In January 2012, the Supreme court gave the verdict in favour of Vodafone].
Following the SC verdict, the Parliament, in 2012, amended the Income Tax Act retrospectively, which allowed tax authorities to re-assess transactions dating back to 1962. Basically, the new law said that a transfer of shares outside India could be taxed if the value of the shares is based on the assets in India. The tax authorities sought to use the legislation to get Cairn UK to pay up. In response, Cairn refused, and the tax authorities sold whatever little assets (9.8%) Cairn UK owned in India to realise the dues. Cairn took the matter to the Permanent Court of Arbitration (PCA) in the Netherlands under the India-UK Bilateral Investment Treaty. The PCA ruled in favour of Cairn UK and awarded $1.7 Billion (including interests and costs) to the company against the Indian Government in December. As per the PCA, the Indian Government had not accorded a ‘fair and equitable’ treatment to Cairn UK’s investments under the Treaty. The Indian Government filed an appeal in Hague in March, while Cairn UK has been trying to enforce the award in various ways.
For instance, in May, Cairn sued Air India in New York to seize its assets and enforce the award. Cairn registered its award in several nations, including the US, UK, Singapore, France, etc. The award can be enforced against India-owned assets in more than 160 countries that have ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Cairn Energy had earlier claimed that they had identified $70 Billion of Indian assets overseas, which it can seize to enforce the award. As per recent reports, a French court has ordered a freeze on real estate owned by the Indian Government in central Paris based on Cairn Energy’s application. Indian Government has denied the claim, saying that it is yet to receive any notice or official communication about the Order.
Loan Data by RBI- Key Insights
The RBI released data on personal loans for March 2020-May 2021 (throughout the pandemic), which offers interesting insights. Personal loans include housing loans, education loans, vehicle loans, consumer durable loans, etc. The demand for housing and vehicle loans remained resilient throughout the period. However, education loans saw a consistent decline. The primary reason behind this is the restrictions on travel, due to which many Indian students have deferred their foreign courses. Further, Indians demanded loans for consumer durables during the first wave but not during the second wave.
Economyria is now on Telegram. For a simplified analysis of topics related to economy/ business/ finance, subscribe to Economyria on Telegram