Given the number of cases in which retrospective taxation was applied, in most of which the government appears to have a weak case, it is not surprising that it should want to remove tax issues from the ambit of the bilateral investment treaties (BIT) that it signs with various countries. While the Vodafone tax dispute is in the arbitration panel formation stage, Cairn Energy has asked for damages of $5.6 billion.
The model BIT was prepared almost two years ago, but according to news reports, India may be able to sign BITs with countries like the US within the next 6-8 months—while India does not have a comprehensive investment pact with the US, the new BIT will replace the existing bilateral investment protection and promotion agreements (BIPPA) signed with 72 countries. The argument made by the government is that tax disputes can be tackled under the double tax avoidance agreements (DTAA) that it has with most countries.
If India is able to pull it off, that will be a big relief to the government, but it may be a costly victory since the premise behind the new BIT is flawed. Instead of worrying about the government being dragged to a foreign arbitration panel and possibly shelling out billions of dollars in compensation, the government needs to worry about addressing the pain points of investors.
And, like it or not, unreasonable tax demands are a big source of worry, and the recent tax on FPIs makes it clear that the tax worries are not something that pertain only to the UPA period. The government does have a point when it says it wants foreign investors to try and look for local remedies first, and then go to a global arbitration court.
But to allege foreign investors are not doing this is incorrect—in the case of a Vodafone, it went all the way up to the Supreme Court and won the case when the retrospective tax was introduced; in other cases like Cairn, countless representations have been made to the government. One way to ensure there is a genuine attempt at reconciliation in India could be to put in a clause in the BIT that says no case can go for global arbitration for 2-3 years during which various attempts at remediation, including through courts, can be tried.
After this period, however, investors must see a way out. It doesn’t help that even when foreign investors win arbitration awards, like Devas Multimedia did against ISRO-arm Antrix—it was awarded $672 million in damages—this does not get translated into action; Antrix has challenged the award in court. A BIT without a clear framework for resolution of tax issues and implementation of arbitration awards quickly is a waste of time since it does not address major investor concerns.