The Indian government has refunded ₹7,900 crore to Capricorn Energy, formerly known as Cairn Energy, to settle its retrospective tax demand, ending a long-standing dispute that hit the country’s image as an investment destination.

Capricorn Energy said in a statement that it has received net proceeds of $1.06 billion from India. A circular is expected to be issued in early March detailing the shareholder resolutions required in connection with the proposed shareholder return of up to $700 million, comprising a $500 million tender offer and $200 million ongoing share repurchase programme, the British company said.

The dispute started after the Indian government sought to recover tax liabilities from Cairn by enforcing the 2012 retrospective amendments to tax capital gains made from the transfer of shares from a foreign entity whose assets were located in India. India had tweaked tax laws in 2012 and had made them effective from 1962.

The shares held by the British firm in Cairn India, which was later acquired by Vedanta, were attached by the income tax department.

In December 2020, a three-member international arbitration tribunal unanimously overturned the levy of taxes on Cairn retrospectively and ordered refund of shares sold, dividend confiscated and tax refunds withheld to recover such demand. It awarded Cairn $1.2 billion in compensation that India was liable to pay.

The court cited that the claim by the Indian government was “in breach of the guarantee of fair and equitable treatment”.

The Indian government challenged the verdict saying it never agreed to arbitrate over a “national tax dispute”.

Cairn Energy then secured a French court order to seize some 20 assets belonging to the Indian government in Paris to recover a part of its dues.

To enforce the arbitration award, Cairn also filed a lawsuit in a court in the South District of New York, seeking to make erstwhile national carrier Air India liable for the judgment that was awarded to the British oil explorer.

In August 2021, the government introduced a Bill in the Parliament to scrap retrospective tax rules that gave the tax department power to go 50 years back and slap capital gains levies wherever ownership had changed hands overseas but business assets were in India.

In November 2021, Cairn Energy entered into an undertaking with the Government of India in order to participate in the scheme, the Taxation Laws (Amendment) Bill 2021 (the “Taxation Amendment Act”), allowing the refund of taxes previously collected from Cairn in India.

The Taxation Amendment Act nullified the tax assessment originally levied against Cairn in January 2016.

The company later withdrew all arbitration enforcement lawsuits in the courts as part of its settlement with the Indian government in the retrospective tax case.

Retrospective tax

Retrospective tax: India pays ₹7,900 crore to Cairn to settle dispute