Armed with the text of a model bilateral investment treaty (BIT) that explicitly bars any enterprise from a treaty partner country from seeking relief on tax disputes under the treaty, India has fast-tracked the process of replacing several existing accords with fresh BITs and clinching such deals with countries outside India’s current treaty framework.
While the Cabinet note has already been circulated for a BIT with Cambodia, new treaties with countries with which India has strong economic ties will follow, sources said.
However, talks with the US —one of India’s largest trading partners and a big investor in defence and several other sectors — the path to the deal could turn out to be a bit long. This is because the US is not one among India’s existing Bilateral Investment Promotion and Protection Agreement (BIPA) partners and the BITs have no defined foundation to stand on.
People privy to the early talks with Washington in this connection told FE that the US has demanded its companies be given the right to seek international arbitration rather than seek remedy through local courts in case of disputes, something which goes against the grain of India’s BIT text and so, it is not inclined to accept. India has over 80 BIPAs with its trading partners.
Sources said the US has also redefined its investment protection accords with major partners and so aligning these norms with India’s BIT would be necessary. The US has asked for “high standard” pacts like the ones India has with Japan and South Korea, they added.
US ambassador to India Richard Verma recently said “things have become a bit more difficult” after India revising BIT text. He is reported to have said that the new model substantially narrows the scope of investments to be covered by the treaty.
As per India’s revised BIT text, foreign investors have to exhaust domestic legal remedies before seeking international arbitration in disputes. This provision is understood to have put off some countries, including the US. Among others, it also limits the investment protection and other benefits accorded to foreign-owned companies under bilateral treaties only to the firms that are incorporated in India, comply with domestic legislations and government decisions at all levels.
The model excludes matters such as government procurement, taxation, subsidies, compulsory licences and national security to preserve the regulatory authority of the government. Tax matters, New Delhi
contends, can be resolved through the double taxation avoidance agreements.
In the case of Japan and South Korea, the BIT elements have collapsed into New Delhi’s Comprehensive Economic Partnership Agreement (CEPA) with these countries. In case of South Korea pact, for instance, the restrictions on foreign direct investments have been considerably cased from what is autonomously done for other countries. Under Indo-Japan CEPA, import duties on most products are nil and access for Indian professionals and contractual service suppliers to the Japanese market has been enhanced and investment rules eased.
With business ties with India increasing, the US wants a robust pact with India that benefits its companies. The trade between the US and India has nearly doubled over the last few years — from $60 billion in 2009 to $107 billion in 2015. FDI inflows from the US to India has more than doubled to $4.2 billion in FY16 from $1.8 billion in FY15.