India’s finance ministry has drafted a model bilateral investment treaty that keeps disputes over taxation and compulsory licenses out of arbitration. The objective is to seek a better balance between the rights of foreign investors and the government’s obligations.

The ministry has sought public comments on this draft by April 11, and is now expected to take it to the Union Cabinet for approval. After it is cleared, the first test case would be a high-standard bilateral investment treaty expected to be inked with the US. Currently, India has signed bilateral investment and protection agreements (BIPAs) with 83 countries, out of which 72 are in force. 

The government is concerned about the rising numbers of foreign investors taking India to arbitration. Four years ago, it faced an adverse decision on a dispute between the state–owned Coal India and the Australian firm, White Industries. More recently, UK telecommunications giant Vodafone and energy major Cairns were charged with retrospective tax demands and have gone in to arbitration over these, citing the provisions of the BIPAs India has signed with the UK and the Netherlands, respectively. 

This model treaty – which would be in force for a 10-year period when signed – shall not apply to “any taxation measure. Where a host state asserts as a defence that conduct alleged to be a breach of its obligations under this treaty is a subject matter of taxation which is excluded by this article from the scope under this treaty, any decision of the host state, whether before or after the commencement of arbitral proceedings, shall be non-justiciable and it shall not be open to any arbitration tribunal to review any such decision”. The issuance of compulsory licences is the other major area that has been kept out of arbitration.

The draft treaty thus aims to check foreign investors from seeking arbitration on tax and intellectual property rights matters. The government’s revenue secretary Shaktikanta Das in a TV interview to Indian business news channel ET Now categorically stated “on the BIPA issue, let me mention, it has been our consistent view that tax disputes cannot be a matter of arbitration. They have to be judicially and legally settled”. The draft treaty has also proposed a dispute settlement tribunal which foreign investors can approach when all local remedies have been exhausted.