Don’t blame taxman for this, solely the PM’s call
On the face of things, the income tax department renewing its freeze on the Cairn India shares owned by the UK-based Cairn Energy is a mere formality. The injunction on the sale was going to expire, and had it not been renewed, Cairn Energy would have been free to sell the shares—whether it would at the current low crude oil prices is a different matter—and, had this happened, the taxman would have had no leverage on Cairn Energy as far as the R10,247 crore tax demand goes; it is, of course, a different matter that since the shares are worth around $300 million today, the leverage amounts to nothing. More important, from the taxman’s point of view, had the injunction not been renewed, the CBI could come knocking on his door anytime alleging a nexus with Cairn and probably a payoff as well—in other words, you can’t hang the case not being settled on the taxman—since a tax demand had been raised. Never mind if it was unjust (it was based on the retrospective amendment to the tax law) or unwise (it was based on a corporate restructuring where not a single rupee changed hands).
Resolving the case is a political call, a call that the government was too scared to take since it felt doing so would open it to the charge of crony capitalism or, to useRahul Gandhi’s phrase, a suit-boot-ki-sarkar. That is why finance minister Arun Jaitley came out with his half-way house of letting the courts decide on these cases. It was a half-way house, and totally unconvincing, since even now, the government’s case in the arbitration court is that the case is not something that can be the subject of arbitration. It was unconvincing because, even in the case of the Antrix-Devas arbitration that has gone against the government—an award of $672 million has been given against Antrix, but this has not been paid—so even if Cairn wins the case, there is no certainty it will ever get its shares back.
It is not clear what the government’s hesitation is about since, after publicly saying the R40,000 crore that could be got by taxing FIIs could change the face of India’s irrigation sector, finance minister Jaitley had no problem referring the matter to the AP Shah panel and then withdrawing the notices and quashing the tax. Nor did the Cabinet have any problem in not challenging the Bombay High Court judgments in the Vodafone and Cairn transfer pricing cases and going to the Supreme Court. In both cases, potentially tens of thousands of crore of tax money was being waived off, but there was no allegation of cronyism—so it is not clear why the current Cairn and Vodafone tax cases are different. Despite India’s FDI being at an all-time high, thanks to huge inflows into e-commerce and other start-ups, the government seems to realise the growing trust deficit with a certain group of foreign investors. That’s why, presumably, the prime minister has kept reassuring investors—the latest, just a few weeks ago—that he plans to fix things in such a manner that no government, now or later, can ever use the retrospective tax. Given how many times this has been reiterated by the government, and nothing done to back this up, it is high time there was some action on this in the budget—the time for signalling is long gone, investors aren’t impressed with that.