1. The need to align with global reality

The need to align with global reality

It is anticipated that the domain of ‘investments’ may be further tapered to exclude short-term foreign institutional investments from the scope of BITs

Published: December 26, 2014 12:41 AM

The Bilateral Investment Promotion and Protection Agreements (BIPAs)—the agreements that guarantee a slew of rights to the foreign investors operating in India—have recently been in focus as investors have raised or are threatening to raise disputes with the Indian government. India has signed BIPAs with 83 countries in order to offer favourable conditions and treaty-based protection to foreign investors and investment.

The White Industries award against India which granted close to $10 million in damages for delays by Indian courts in the enforcement of an earlier arbitration award has brought India’s BIPAs in the limelight. More recently, a number of investors have indicated that they propose to invoke provisions of the BIPAs for enforcing their rights, which, in their view, are being violated in India.

Vodafone Plc, a UK-based company and the world’s largest telephone service provider, has sent a notice invoking provisions of the India-Netherlands BIPA through its Dutch subsidiary Vodafone International Holdings BV, against the retrospective application of capital gains tax included in the Finance Act, 2012.

In light of the claims against the government, the Department of Industrial Policy and Promotion (DIPP) has made a strong pitch for invoking a sunset clause in all its BIPAs to terminate existing pacts and also consider whether it wants to enter into any new ones.

On the other hand, the government is set to revise the model text for the Bilateral Investment Treaty (BIT) in line with changing times. A number of new provisions are being introduced vide a draft Cabinet Note circulated by the finance ministry to protect the sovereign from being dragged into investment disputes under the treaties.

The renewed model of the BIT comprehends noteworthy changes vis-a-vis the prevailing BIPA, one being expansion of the scope of the term ‘expropriation’, which allows the contracting state to take possession of private assets in order to serve ‘public purpose’. Under the existing BIPAs, the term ‘public purpose’ has not been clearly defined, which enables overseas entities to sue the Union and state governments in foreign jurisdictions. In contrast, the new model would empower the government to bring within the ambit of ‘public purpose’, policy measures beneficial to the populace; for instance, ensuring affordability of essential commodities.

Conversely, the BIT model proposes to limit the scope of the term ‘investment’ to exclude within its purview investments made in India by foreign entities indirectly through intermediary or investment holdings companies set up in foreign dominions, thereby acting as a strong barrier for companies promulgating the practice of ‘treaty shopping’ to garner unwarranted benefits in case of disputes with tax and regulatory authorities.

Moreover, it is also anticipated that the domain of ‘investments’ may be further tapered so as to exclude short-term foreign institutional investments from its scope.

Considering the brewing controversies around the retrospective amendments in tax laws on indirect transfer of shares and consequent to issuance of notice by telecom major Vodafone to the government by invoking clauses of the contemporary protection agreements, there is a strong prospect for exclusion of taxation-related provisions, as are available in the extant BIPAs which are explicitly dealt with by the Double Taxation Avoidance Agreements.

In this sense, one can say that it will result in a paradigm shift, wherein the agreements will now advocate promotion of investments rather than protection thereof.

It is also expected that the new BITs would incorporate time limits within which decisions can be challenged before appropriate authorities in foreign jurisdictions. Further, in order to address the issue of Balance of Payments, there could be restrictions on payments related to investments, including those in the nature of royalty. Besides, in order to curb the growing menace affecting India’s economy, the model BIT text includes provisions whereby foreign investors will be barred from claiming protection of such agreements post infusing black money into India.

Considering that the NDA-led government inherited reins at a time when the coffers permitted minimum reforms, their resolve to instil confidence through dynamic policy measures has created prospects for a fresh vigour in the investor community. Prime Minister Narendra Modi, in his address to party workers in Panaji, Goa, mentioned, “Taking tough decisions and strong measures in the coming one or two years is needed to bring fiscal discipline which will restore and boost the country’s self-confidence,” It now remains to be seen that after considering the adversities caused by the actions of the erstwhile government, whether the new BITs transpire into a pro-growth eventuality or are viewed as deterrent to India’s journey towards the 7-8% growth trajectory in the coming three years.

Girish Vanvari

(Hiren Bhatt, director, Tax, KPMG in India, contributed to this article.)

The author is co-head of Tax, KPMG in India. Views are personal

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