BITs and pieces of trade with Israel:

BITs and pieces of trade with Israel: (The Hindu, Editorial) India-Israel relationship: Trade and Potential BIT

Context

• The bilateral relationship growing and potential of Investments seems increasing.

Growing trade relations

• Bilateral merchandise trade increased from $200 million in 1992 to around $4 billion in 2016, an increase of 2,000% in 25 years.
• Cumulative foreign direct investment (FDI) inflows from Israel, from April 2000 to March 2017, stood at $122 million.
• Comprising only 0.04% of total FDI inflows to India, there is enormous potential for Israeli investment in fields such as renewable energy and water management (drip irrigation and desalination).
• Defense production, which is at the heart of the ‘Make in India’ campaign, is another area with significant potential for Israeli investment, a move that will help India save billions of dollars it currently spends on importing weapons from Israel.
• Israel is the third largest supplier of arms to India after Russia.
• The U.S. Investment in defense production will also give a boost to domestic manufacturing, reduce dependence on bureaucratic state-owned ordnance factories and bring in new technology.

New Bilateral Investment Trade (BIT) on cards

• In 1996, India and Israel signed a BIT.
• The BIT was reportedly terminated by India when it unilaterally discontinued 58 BITs recently.
• For a new BIT to be negotiated, both sides will have to start afresh.

Challenges countering BIT between India – Israel

• The investor-state dispute settlement (ISDS) provision that allows foreign investors to bring claims against a host state for alleged treaty breaches at international arbitral forums.
• Foreign investors prefer international arbitration, which is faster and independent, over litigating in domestic courts.

The Israeli model

• The Israeli model gives an investor the choice to submit any investment dispute with a state to international arbitration if not resolved within six months through negotiations.
• The Israeli model contains a broad most favoured nation (MFN) provision, a cornerstone of non-discrimination in international economic relations which is missing in the Indian model.
• The absence of MFN, from Israel’s perspective, would mean that its businesses would have no remedy under international law if India were to discriminate against it, say, by offering greater incentives to another defense manufacturer over an Israeli one.
• In the Israeli model, taxation-related measures are recognized as an exception only to MFN and national treatment provisions.
• Foreign investors can still challenge taxation-related measures for violating other BIT provisions such as the fair and equitable treatment or expropriation.

The Indian model

• The Indian model imposes many procedural and jurisdictional restrictions on an investor’s right to bring an ISDS claim.
• These include a foreign investor having to litigate in domestic courts for five years before pursuing a claim under international law.
• These requirements make it very difficult for a foreign investor to make efficient use of the ISDS provision.
• The Indian model of 2016 defines investment narrowly as an enterprise (with its assets) that has to possess certain characteristics of investment including the investment having ‘significance for the development’ of the host country.
• The Indian model excludes taxation altogether from the purview of the BIT.
• Thus, the foreign investor cannot bring an ISDS claim even if taxes imposed are confiscatory, discriminatory or unfair.
• However, in the Israeli model, taxation-related measures are recognized as an exception only to MFN and national treatment provisions.
• Foreign investors can still challenge taxation-related measures for violating other BIT provisions such as the fair and equitable treatment or expropriation.
• India’s recent record in administering its taxation laws has made foreign investors jittery.
• The World Investment Report 2017 issued by the United Nations Conference on Trade and Development also points out that tax-related concerns are a deterrent for some foreign investors to invest in India.
• Thus, Israeli investors will not be comfortable if taxation is completely outside BIT’s purview.

Conclusion

• Indian position on BITs is very pro-state, offering limited rights and protection to foreign investors.
• The Israeli position is the opposite.
• An India-Israel BIT looks difficult till both sides move away from their stated positions.
• Both sides need to work towards having a BIT that reconciles investment protection with a state’s right to regulate.