Why is the Indian Government trying to close retro tax cases with Cairn and Vodafone?

It is a good question considering the bill for scrapping the draconian/toxic law of 2012 was passed through The taxation laws (amendment) Act, 2021 and it received Presidential assent on August 13, 2021.

Backdrop

The then finance minister, Pranab Mukherjee, introduced the bill with specific players in mind, who according to the finance ministry had evaded taxes on the transaction deal which had assets based in India

Troubleshooting minister to popular President: Pranab Mukherjee in politics  | Business Standard News
Then Finance Minister & Later President of India: Pranab Mukherjee
First Target: Hutchison-Vodafone Deal of 2007
Vodafone-Hutchison Deal via Cayman Islands

The IT Department claimed that there was tax evasion of US $2.5 Billion.

Second Target: Cairn Energy

Cairn Energy had reorganized its business and it is claimed by the IT department that the company was able to make windfall gains in 2006–07.

CEO, CFO of Cairn India Quit
Cairn Energy India – Indian Arm of Cairn PLC

The following are the sequence of events

Sequence of Events linked to Cairn Energy

The IT department is now demanding – US $1.2 Billion + US $500million(interest) (approx. Rs 24,500 Crores)

Prior to the initiation of any action, Cairn Energy in 2010-11, had sold the majority stake in Cairn India amounting to ~59% Vedanta.

Vedanta Limited: Consolidated Results for the Fourth Quarter and Full Year  ended 31st March 2021
New owner of Cairn Energy (India) – Vedanta

Outcome of the Tax Demands

Vodafone

The telecom giant’s Indian arm was unable to make much headway in the Telecom market and also with the Indian Government.

Vodafone India

With the entry of Reliance Industries owned -Reliance Jio Infocomm, the already competitive market turned into a blood bath with many telecom service providers shutting shop while the remaining entering into a phase of cash burn to retain users.

Mukesh Ambani led RIL’s – Jio Infocomm

In this quest, it merged with Idea to form Vodafone-Idea. This though turned to be a Band-Aid with the merged entity unable to report even a single quarter of profit to date!

Vodafone-Idea Merger in 2018

With mounting losses, business was turning to be unsustainable. To add to the woes, there was a demand for the AGR dues of Rs 50,400 crore

The telecom service provider is on the verge of collapse with a net loss for the April-June 2021 quarter at Rs 7,319.1 crore and revenue fall of 4.7% quarter-on-quarter to Rs 9,152.3 crore

The collapse of Vodafone-Idea during the Covid-19 era can lead to

  1. Mass unemployment
  2. Haircut for the lenders
  3. Denting government’s claim regarding ease of doing business

Cairn Energy

The dispute went to international courts with the arbitration tribunal in Hague awarding the case to Cairn Energy and asking India to pay US $1.7 billion in Dec 2020.

To enforce the verdict, Cairn Energy filed a lawsuit in multiple courts to seize the assets of Air India as it stands as a representative of the Indian Government.

Debt-ridden National Carrier – Air India

As an entity on the verge of disinvestment, Air India, if it gets embroiled in some unrelated topic, then the prospects of it finding a new owner may be as well and over.

Owing to this, the government is trying to cut losses and get out of the legal hassle that can endanger the workforce in the country or the country’s image, or the country’s sovereign assets.

Also, you may like to read more about Vodafone Idea, you can check this out: https://garao.in/2021/08/08/what-is-the-future-of-the-stock-vodafone-idea-under-the-current-circumstances/

Hope this helps. Happy Investing!

References:

  1. Retro tax law scrapped; Taxation Law (Amendments) Act 2021 gets Presidential assent
  2. Retrospective Taxation India – Meaning, Purpose and Validity
  3. Retrospective Tax
  4. Arbitration case: Cairn Energy offers to invest $1.2 bn if India relents
  5. Cairn Energy dispute | Vigorously defending case against arbitration order, says govt.
  6. Explained | India’s Dispute With Cairn Energy & $1.7 Billion Arbitration Award
  7. AGR dues: Govt must work to ease Vodafone-Idea’s pain
  8. Vodafone Idea Q1 Results: Net Loss Widens As Revenue Falls

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