The government is weighing its legal options after losing the high-profile international tax arbitration case against Vodafone as it looks to limit damages not just in this matter but also in case of a separate lawsuit with Cairn Energy goes against it.

Last month, an international arbitration court ruled that the Indian government seeking ₹22,100 crore in taxes from telecom giant Vodafone using retrospective legislation was in “breach of the guarantee of fair and equitable treatment” guaranteed under the bilateral investment protection pact between India and the Netherlands.

Finance Ministry sources said the government will decide on challenging the award before a court in Singapore – which was the seat of the arbitration, after taking legal opinion.

While the cost implication in the case is limited to having to pay ₹85 crore to Vodafone in legal cost, what is weighing on the government mind is a separate arbitration involving UK’s Cairn Energy plc.

If a separate arbitration panel were to hold a demand for ₹10,247 crore in taxes using the same retrospective legislation as illegal, the government will have to pay Cairn as much as USD 1.5 billion ( ₹11,000 crore).

This is the amount equivalent to the value of shares of Cairn that the government had sold to recover a part of the tax demand. It also includes the dividends and tax refund seized.

Sources said Vodafone International Holding (a Netherland company) had in February 2007 bought 100 per cent shares of Cayman Island-based company CGP Investments for USD 11.1 billion to indirectly get 67 per cent control of Hutchison Essar Ltd – an Indian company.

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