Tax issues out of future bilateral treaty

Tax disputes are to no longer form a part of a Bilateral Investment Treaty signed by the government with another country, the Union Cabinet decided on Wednesday.

The idea is that foreign companies finding themselves in a tax row with the government will not be able to invoke the investment treaty their parent country has signed with India, the case at present.

For instance, British telecom major Vodafone had invoked the India-Netherlands Bilateral Investment Promotion and Protection Agreement (Bippa, it is formally registered in the latter country), seeking international arbitration in its long-drawn Rs 20,000-crore (Rs 200-billion) tax dispute, following the cancellation of conciliation talks.

Similarly, Finnish mobile handset maker Nokia resorted to this for resolving the tax department's claim of liability, existing and anticipated, for seven years from 2006-07.

Cairn Energy, too, recently demanded compensation under the ambit of the India-UK Bippa, from India for the Rs 10,200-crore (Rs 102-billion) tax notice slapped on Cairn India.

The government has signed Bippas with 72 nations.

It has signed but not yet enforced these with an additional 11.

The revised model BIT, to be used now for renegotiation of existing treaties and for new ones, excludes matters such as government procurement, taxation, subsidies, compulsory licences and national security.

It also has a number of other measures which aims to make it difficult for foreign companies to seek arbitration against Indian authorities, through restrictions on dispute resolution tribunals and their jurisdiction, when compared with the existing Bippa text.

The essential features of the new BIT include an enterprise-based definition of investment, non-discriminatory treatment, protections against expropriation, a refined Investor State Dispute Settlement provision requiring investors to exhaust local remedies before commencing international arbitration, and limiting the power of the tribunal to awarding of monetary compensation.

“The new model text will provide appropriate protection to foreign investors in India and Indian investors in the foreign country, in light of relevant international precedents and practices, while maintaining a balance between the investor's rights and government obligations,” went an official statement on Wednesday.

Illustration by Uttam Ghosh/Rediff.com