Income tax department should let Cairn India go ahead with share buyback from Cairn Energy

The income tax department is wrong to hold up Cairn India’s buyback of shares from UK’s Cairn Energy till the oil and gas exploration company settles possible tax dues on a past deal. Such moves are contrary to the assurance held out by the government that its retrospective clarification on capital gains would not be applied to cases other than those already processed.

Companies usually buy back shares when they have idle cash or when they think they are undervalued, but nevertheless, it is a commercial decision. It is unjust for tax authorities to block the plan simply because they lack clarity on enforcement of the so-called retrospective tax rule.

Cairn Energy had transferred shares owning Indian assets, held in a subsidiary in Jersey, a tax haven, to Cairn India in 2006. Subsequently, the firm was listed on the stock exchanges.

The tax department now wants to figure out if the profits made by the British company by selling shares in the initial public offering in India should be taxed. A parallel has been drawn with the Vodafone tax dispute where the government held that capital gains tax would be charged on a past deal if value accrues to the company changing ownership because of its economic activity in India. The Vodafone case has not been settled just yet. And the tax department must desist reopening similar deals.

Investors loathe fuzzy tax rules. So, the rules must be simple and the process of interpretation transparent, with competent people manning it. A radical change in the taxman’s mindset is a must to enable companies to take commercial decisions and run their business in India. Else, finance minister P Chidambaram’s promise of a non-adversarial regime will remain on paper. We also need low tax rates and stable tax laws to attract more foreign investment.