If all goes to plan, the Cairn Energy Plc settlement against the Indian tax authorities $4.4 billion tax demand—$1.6 billion of this was the original demand, the rest is interest, but more penalties could be added—could get resolved towards the end of the year. The arbitration court will have its final hearing in August and a ruling could be out by October or November. No matter who wins, the stage is set for an end of one of the messier chapters—there are others, like Vodafone which is also in arbitration, but not as advanced as Cairn—in India’s tax history and relations with foreign investors. Should Cairn win, as most expect given the arbitrary nature of the demand, the question is what the government will do. Normally, it should pay up but so close to the election, it may not want to—keep in mind that, in the DoCoMo arbitration, even after the foreign award against the Tata Group, RBI argued in Indian courts against implementing the award.
Life would be so much simpler, for both the government as well as investors, if there was a robust dispute resolution process. There is a dispute settlement mechanism right now under the tax law, but it is very limited in scope. There is, for instance, no provision to settle on the basic fine—the current resolution allows for just reducing the penalties and interest. The current system doesn’t allow companies the option to appeal if the appeal doesn’t go their way.
However, if there was a system that permitted a Cairn or a Vodafone to not admit guilt—Vodafone, in fact, won in the Supreme Court, after which the government brought in the retrospective amendment—and to negotiate a settlement, chances are the companies would go for it.
In the Cairn case, when the taxman seized its shares that were worth $1 billion, it had to lay off workers since it didn’t have the capital to invest in other ventures. The shares lost a substantial part of their value once oil prices collapsed, and while some of this has been recouped with oil touching $70, the opportunity cost has been large. Since the company was always aware of India’s tortuous legal system, as it celebrates the fourth anniversary of its tax case, it may have preferred to settle for a few hundred million dollars.