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Sunday, November 28, 2021

Explained: How buyback using retro tax refund helps Cairn

Cairn is set to receive a refund for taxes collected over an internal rearrangement process, in which Cairn UK transferred shares of Cairn India Holdings to Cairn India in 2006-07.

Written by Karunjit Singh | New Delhi |
Updated: November 16, 2021 8:15:02 am
Cairn, Cairn Energy, Cairn retro tax refund, Cairn UK, Indian ExpressCairn sold a majority of its India business to Vedanta resources Ltd. in 2011 but income-tax authorities barred it from selling about 10 per cent, citing pending taxation issues. (PTI Photo/File)

British oil and gas exploration company Cairn on Monday announced a share repurchase programme worth GBP 20 million (Rs 199.9 crore) prior to a larger buyback programme after the company receives approximately Rs 7,900 crore of $1.06 billion from the government of India. We examine details of the refund and Cairn’s share buyback plans.

Why is Cairn receiving a refund?

Cairn is set to receive a refund for taxes collected over an internal rearrangement process, in which Cairn UK transferred shares of Cairn India Holdings to Cairn India in 2006-07. Tax authorities treated the transfer as a sale and sought to impose taxes of Rs 24,500 crore over the transaction after passing an amendment in the IT Act allowing the government to tax the transaction retrospectively.

Cairn sold a majority of its India business to Vedanta resources Ltd. in 2011 but income-tax authorities barred it from selling about 10 per cent, citing pending taxation issues.

The government amended the Income Tax Act to allow for retrospective taxation of the transaction after the Supreme Court verdict in a similar case which held that Vodafone could not be taxed for a 2007 transaction that involved its purchase of a 67 per cent stake in Hutchison Whampoa for $11 billion.

After prolonged litigation Cairn won an award of $1.2 billion form the permanent court of arbitration at the Hague and sought to have it enforced through the seizure of government assets in other countries including those of Air India.

Post the verdict the government had in August amended the Taxation Laws Act to remove end all retrospective taxation on the indirect transfer of Indian assets prior to May, 2021. The government also moved to start talks to settle claims of companies that had been taxed retrospectively under the respective taxation amendment including Cairn and Vodafone.

How is Cairn using the refund?

Has previously announced that it intends to use the refund from the Indian government to distribute $700 million to shareholders through dividend payouts and share buybacks.

In a share repurchase a company buys back its own shares from the marketplace as a way to distribute earnings to shareholders.

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