India will keep taxation out of the ambit of bilateral investment treaties, with the model text of the treaty expected to be taken up by the Cabinet soon.
What's Been Circulated So Far
The finance ministry has circulated a note for the Cabinet's consideration, an official said, adding that talks for bilateral investment treaties with four to five countries are currently underway. The existing Model BIT (bilateral investment treaty) was approved by the Cabinet back in 2015, and this revised version marks the next step in updating that framework.
Why Taxation Is Being Kept Separate
"No tax-related provisions will be part of the framework as we are not willing to give up our sovereign right to taxation," the official said, adding that foreign investors will also have to exhaust local remedies before initiating arbitration. This stance reflects a deliberate choice by India to preserve its policy flexibility over tax matters, rather than allowing tax disputes to be resolved through international treaty-based arbitration, a mechanism typically reserved for broader investment protection issues.
What a Bilateral Investment Treaty Actually Does
A bilateral investment treaty is an agreement between two countries to promote and protect investments made by their investors in the other's territory. Under investment protection treaties, investors can take a sovereign government to arbitration if they believe their investment has been unfairly treated or expropriated.
The Local Remedies Requirement
Alongside excluding taxation from the treaty framework, foreign investors will also need to exhaust local remedies before initiating arbitration under this revised model. This requirement generally means investors must first attempt to resolve disputes through India's domestic legal and administrative channels, before escalating the matter to international arbitration, a provision aimed at reducing the number of disputes that go straight to arbitration without first being tested through local processes.
The current framework requires a foreign investor to wait for five years before initiating a treaty-based arbitration against India, and it remains to be seen whether this waiting period will change under the revised model once it's formally considered and approved by the Cabinet.
FAQs
Q1. Why is India keeping taxation out of its bilateral investment treaty framework?
According to officials, India wants to preserve its sovereign right to taxation and does not want tax matters to be subject to international treaty-based arbitration.
Q2. What is a bilateral investment treaty (BIT)?
A BIT is an agreement between two countries to promote and protect investments made by their investors in each other's territory, allowing investors to potentially take a sovereign government to arbitration under certain conditions.
Q3. What additional requirement will foreign investors face under the revised model?
Foreign investors will need to exhaust local remedies in India before initiating treaty-based arbitration, rather than escalating disputes directly to international arbitration.