A BIT for FDI (On the need to renew BIPA)

Source:  Business Standard 

Relevance: Taxation laws in India, Issues with BIT 

Synopsis: Repeal of retrospective tax law gives government the opportunity to renew the 70-odd Bilateral Investment and Protection Agreements (BIPA)

Impacts of BIT and retrospective taxation

BIT and retrospective taxation increased international arbitration cases.

1. First, India has never been comfortable recognizing investments from abroad when they are asset-based. It sought to promote an “enterprise” based definition for greenfield investment as a more suitable example of foreign direct investment (FDI).  
2. Second, issue of national treatment, which the department of economic affairs in the finance ministry notes, should be the sole non-discrimination standard to be applied to all companies investing in India. To qualify for it, companies have to demonstrate they have a permanent business establishment in India, as well as agree to some new yardsticks such as data localization and sourcing requirements. If they do not do so, there could still be problems for investors to invoke BIT to protect their interests. 

Evolution of BIT policy

1. From 1993, India began to sign International Investment Agreements. Less importance was given to the consequences of these agreements as India needed the foreign money.  
2. In 2011, in White Industries of Australia and Coal India case, the arbitration went in favour of the Australian firm.  
3. In July 2012, the government set up a committee to review these agreements which recommended for a uniform BITs regime that India should adopt with all countries.  
4. But as per United Nations Conference on Trade and Development noted, the new framework was not designed “as an instrument for investment promotion”. It was drafted to safeguard India as a host State from the large number of investment treaty claims. 
5. The model BIT with the retrospective law allowed the government to tax indirect transfers of an Indian capital asset. Foreign investors have argued that the rights of punitive taxation written in the BIT are similar to expropriation.  

The Indian tax department had argued there can be no restriction in its power of taxation. Now by 2018, India had the largest number of international arbitration cases. 

Why India needs to renew BIPA? 

1]. First, countries assure foreign investors when inviting their investment that their administrations will provide tax certainty. If that certainty comes unstuck, BIPA comes into play.  

• For instance, China does not have a BIPA and there are several countries with such agreements that do not draw in money from abroad.  
• They are costly and the publicity surrounding the action makes foreign investors nervous.  
• New options are now available to investors to avoid having to live under a BIPA.  

2]. Second, India discovered this fact once it had begun with attempts to enter global bond indices. Fund managers for foreign investors have said India has to list its government debt papers in European depositories. 

• The process helps investors avoid exchange or tax losses.  
• Despite these innovations, BIPA retains its importance for investors who buy or develop physical assets in India.  

3]. Third, the Model BIT of 2016 inserted clauses that tilt strongly in favour of the sovereign. That is why no BIPA has been renewed since 2017 when most of them expired.  

Conclusion

The BIT framework has the opportunity to be reworked. However, the challenge with this move is that it would circumscribe the rights of the tax department.