Retroactive Taxes Put India On The Hook

India's attempt to collect taxes from companies retroactively appears to be backfiring.

UK-based Cairn Energy filed suit in the Southern District of New York in mid-May against state-owned Air India, to seize assets by way of enforcement of a late-2020 $1.2 billion arbitration decision against the Republic of India by the Hague-based Permanent Court of Arbitration under the UK-India bilateral investment treaty.

It is exceedingly rare for a foreign company to seek seizure of Indian government assets held within and outside of the country, including cash accounts and shares of the flagship national carrier, soon to be privatized. Cairn seems to have the force of law from a third jurisdiction behind it, and other companies may follow suit.

Cairn’s complaint originates with a 2012 revision to the Indian tax code. The change was made in direct response to an Indian Supreme Court decision that denied the government’s right to any tax from the sale of Indian assets by a Hong-Kong–based company to a UK-based one.

Stymied by the court, the government devised the new rule on taxation of offshore transactions involving Indian capital assets, deeming any gains arising from the transfer of shares or interest in any offshore company as taxable “if the share or interest derives, directly or indirectly, its value substantially from the assets located in India,” with a clause making it retroactive to April 1, 1962.

The Indian government then proceeded to send out bills. Cairn was hit for $3 billion in capital gains taxes and penalties in March 2015 for a 2006 internal reorganization of its Indian entities. The government even seized 10% of Cairn India’s shares—worth $1 billion—as partial payment.

Cairn isn’t the only company challenging India’s government on this issue. In February, Earlyguard, a UK subsidiary of Mitsui & Co., began arbitration regarding India’s $338 million tax demand based on a sale it made in 2007. But by seeking help from US Federal Courts to seize Indian assets, Cairn is taking a sharp stance. Turnabout is fair play, as the saying goes.