India-EU ties stumble over keeping tax out of bilateral investment treaty

The EU is concerned that this will leave little protection for its investors in India

The government has tried to plug the loopholes that enabled companies such as Vodafone and Cairn to go for international arbitration over tax disputes. As such, it came out with model Bilateral Investment Treaty (BIT), 2015.

BIT, the model draft of which was cleared by the Union Cabinet in December 2015, keeps taxation out of its ambit, with the idea that foreign companies finding themselves in a tax row with the government will not be able to invoke the investment treaty their parent countries signed with India, as is the case with the Bilateral Investment Protection and Promotion Agreements (BIPPA).

Besides, under BIT, countries can only seek the option of international arbitration when all domestic legal routes have been exhausted.

It is these provisions which are discouraging countries or regions to ink BITs with India. The latest being the European Union (EU). India has done away with older BITs for over 50 countries, including those in the EU, and has asked these countries to sign the new ones based on the new model. The previous BITs with these countries expired on April one.

The EU believes that foreign investments into India will reduce if the country does not extend the older BIT.

However, for the comfort of foreign investors, the model BIT does state that dispute-resolution tribunals, including foreign ones, can re-examine a legal issue settled by Indian judicial bodies.

But since it does not include tax dispute, that means that Vodfone and Cairn could not have gone to international arbitration had these issues come to the fore now and BIT was signed by India and UK or say the Netherlands.

BIT also states that India or any other country cannot nationalise or expropriate any asset of a foreign company unless the law is followed, is for the public purpose and fair compensation paid. Public purpose is not defined in any treaty India has signed with other nations.

However, dispute-resolution tribunals can question ‘public purpose’ and re-examine a legal issue settled by Indian judicial bodies.

BIT is expected to eventually replace the existing BIPPAs that India has signed with 72 nations. India will also sign BITs with countries it has had no comprehensive investment agreements with before, including the US.

In July last year, the Cabinet gave its approval for signing of BIT with Cambodia. The other BITs, however, will now not be signed any time soon.

So far as the EU is concerned, India plans to replace these BIPPAs with individual countries with a pan-EU treaty as part of its aim to attract and safe guard foreign investment while protecting public interest.

European Commission Vice-President Jyrki Katainen had earlier expressed concern about the lack of any legal protection for investors from EU nations. The letter had termed the move by India ‘unilateral’ and pointed to rising capital costs and legal uncertainty as concerns that will keep away investors.

The EU’s share in India’s total trade has also progressively shrunk in recent years. While Indian exports to the bloc constituted 22.52 per cent of all outbound trade in 2005-06, the figure came down to 16.95 per cent in 2015-16. Imports have witnessed a similar slide over the same period, going down from 17.42 per cent to 11.52 per cent.