BIT: New draft treaty unlikely to address tax worries

The finance ministry is likely to release a reworked draft model bilateral investment treaty (BIT), based on comments and feedback from investors, policy & legal experts, the general public, and other stakeholders. However, the Centre is unlikely to dilute its stance on the issue of tax matters and public purpose, in this reworked BIT.

The draft model BIT had proposed to make it difficult for foreign companies to seek arbitration against Indian authorities, through restrictions on dispute-resolution tribunals and their jurisdiction. It also proposed to keep any issue deemed a tax matter by the government outside of its ambit.

The BIT, expected to replace the existing investment protection agreements India has with 83 countries, said tribunals would not have jurisdiction to re-examine any legal issue settled by, or review judgements of, an Indian judicial authority. They also could not question India's determination of whether a measure was taken for a public purpose or in compliance with its law. Public purpose is not defined in any treaty India has signed with other nations. It is kept ambiguous on purpose.

This BIT is expected to replace the existing bilateral investment protection and promotion agreements (Bippa). The draft was kept in public domain until April 10 for suggestions from stakeholders. The new treaty, once complete, could be signed with all countries with which India has bilateral investment treaties. While India has signed Bippa with 72 nations, it has signed but not yet enforced those with an additional 11.

In the reworked draft, based on the suggestions, there might be softening of stand on some proposals, but no compromise on tax issues and 'public purpose', Business Standard has learnt from sources.

"Tax issues are still likely to be kept out of the reworked BIT. If any dispute is a tax-related one, no international tribunal can review it, and no company can under BIT seek compensation related to the matter," said a senior government official who did not wish to be named.

The official also said the section on public purpose might remain unchanged. "Each nation has a separate criterion for what constitutes a public purpose. That is why it is never explicitly defined. And that is why, in India's case, a foreign arbitration authority or tribunal cannot question India's decision to deem any expropriation of a foreign investor's assets as public purpose."

When the draft BIT was put in public domain early in April, it had drawn flak from policy watchers and economists. They said while the existing Bippa might be viewed as too friendly to investors, the BIT went to another extreme; it was too loaded in the government's favour. Some analysts even said inflows into India might suffer if the protection offered to foreign investors under Bippa was taken away. It was also said that other nations might not view the contents of BIT favourably, and might not negotiate with India unless there was a softening of stance on some issues.

PROPOSALS AT A GLANCE

• Making it difficult for foreign firms to seek arbitration against Indian authorities, through restrictions on dispute-resolution tribunals and their jurisdiction
   
• Tribunals should not have jurisdiction to re-examine any legal issue settled by, or review judgements of, an Indian judicial authority
   
• Tribunals could not question India's determination of whether a measure was taken for a public purpose or in compliance with its law