Cairn tax dispute exposes major shortcomings in India’s economic policy

Some ideas are so stupid, George Orwell wrote, that only intellectuals believe them. And policy makers, one may add. Revenue maximisation is such an idea; it has wreaked considerable havoc by scaring away investors, thus precluding higher growth and employment generation possibilities. British oil major Cairn Energy’s successful litigation against India suggests that bad economics can also be bad politics. India’s dispute with Cairn Energy is the direct consequence of the disastrous retrospective tax amendment law, introduced by the Congress-led United Progressive Alliance (UPA) government, and accepted by the Narendra Modi regime. It empowers the government to tax a company retrospectively. It led to a decade-long dispute, still unresolved, with Vodafone. The Cairn case is another one. The British oil major got a notice from India’s Income Tax department in January 2014, asking for Rs 10,247 crore pertaining to the company’s 2006 reorganisation in which Cairn UK had transferred around 10 percent of its stake in Cairn India Holdings to Cairn India. The company contended this demand and opted for international arbitration. On 22 December, 2020, the company won the case, consequent to which India was asked to pay Rs 8,000 crore. Three months later, India appealed against the verdict at The Hague. Cairn Energy said on Thursday that “a Paris court had accepted its petition that Indian state-owned assets in the city worth over 20 million euros ($24 million) be frozen, claiming a significant win in its campaign to force the Indian government to pay Cairn billion-dollar damages in a protracted tax dispute,” Reuters reported. A French tribunal ordered the freeze on some 20 centrally located properties belonging to the Indian government as part of a guarantee of the amount owed to Cairn, the London-listed firm said. “Cairn said it has also registered similar claims against India in courts in the United States, Britain, the Netherlands, Singapore and Quebec.” New Delhi’s response has been pro-forma: it would “take appropriate legal remedies” once it received any notice. A couple of points need to be made here. First, decision makers have made a hash of economic policy by obstinately sticking to revenue maximisation. They fail to realise that a nation can’t be taxed to prosperity. Also, revenue maximisation can never be the goal of economic policy; the goal ought to be prosperity, increase in the wealth of the nation, not a bloated exchequer at the expense of intimidated wealth creators. Tax revenue is maximised when investors feel encouraged to put in their money, augment economic activity, and create wealth and jobs. This creates the virtuous cycle, leading to an increase in tax revenue. In fact, revenue maximisation is serendipitous; it is not the stimulus for growth and development. Second, when nationalism starts ignoring ground realities, it becomes self-defeating; indeed, it ends up hurting national interests, as is the case with Cairn and also Vodafone. On the face of it, accepting the demands of foreign companies often goes against the grain of nationalist rhetoric. But when the demands are just, the results could be bad for nationalists. In the Cairn and Vodafone case, the demands are just. For all laws related to taxation or otherwise are prospective, not retrospective. For example, if prohibition is imposed today in the country, I can be prosecuted for consuming alcohol today evening, not last evening. A law being prospective is the basic principle of jurisprudence. Doggedly persisting with a bad principle does no good to the nation or nationalism, for that matter. If Indian state-owned assets are frozen in France, the US, the UK, and other countries, it will be bad optics, especially for a government that is proud of its nationalist credentials. The saving grace is that Cairn Energy still wants negotiations. It said: “Our strong preference remains an agreed, amicable settlement with the government of India to draw this matter to a close.” While claiming to “vigorously defend its case,” the government also said, “Constructive discussions have been held and the government remains open for an amicable solution to the dispute within the country’s legal framework.” An amicable solution is what the government should aim for.