Too many changes in it could spook investors
Given how Vodafone wants to resolve its ongoing R20,000 crore income tax dispute under the Indo-Netherlands BIPA (Bilateral Investment Promotion and Protection Agreement) in case its informal conciliation with the taxman doesn’t result in a settlement, it is not surprising that the government wants to revise future BIPAs to close this window. Indeed, in recent BIPAs, such as the one signed with Lithuania, the government has partially closed another window, that of expropriation. Both Norway’s Telenor and Russia’s Sistema wanted to invoke various BIPA when the Supreme Court cancelled their telecom licenses in the wake of the A Raja corruption case. The Lithuania BIPA, for this reason, says “actions and awards by judicial bodies of a party that are designed, applied or issued in public interest .... do not constitute expropriation or nationalization". In other words, if your license is cancelled by the courts after trying a corruption case, you can’t seek any reprieve.
Given that BIPAs are meant to safeguard investor interests, and not provide them tax remedies, changing BIPAs to reflect this may not be a bad idea. More so since, in even the Vodafone case, investors agree that capital gains taxes should be paid to India for deals such as the Vodafone-Hutch one; it’s just that since the law did not provide for this, applying this retrospectively is unfair. To fit the Vodafone case under the proposed BIPA, Vodafone Plc will not be able to invoke
BIPA for the tax case involving Vodafone Plc’s purchase of Hutch’s shares in the Cayman Islands. If, however, the government was to revoke Vodafone India’s 3G license, since Vodafone India is a subsidiary of Vodafone Plc, the latter can invoke the BIPA. But removing the tax clause from BIPAs makes it incumbent that India insert an arbitration and conciliation clause in its tax laws, which it does not have at present. If a Vodafone is not to be allowed to invoke a BIPA to resolve a tax dispute, there needs to be an Indian arbitration that it can make use of. The government, however, has to be careful not to over-tweak the BIPA so much that it hurts potential investments from overseas. One amendment being proposed, for instance, is to restrict the application of BIPA only to companies that come in directly and not through holding companies. Given that most investments, and not just those from overseas, take place through holding companies, this is certain to restrict the flow of FDI.