Removing tax woes from BIT defeats its very purpose
It is true that being dragged to arbitration court, and that too in overseas locations, can’t be a pleasant experience, and a lot more firms are doing that to the government of late. Apart from the home-grown Reliance Industries that has several foreign arbitrations against the government, several MNCs are also doing the same. While Vodafone Plc took the government to arbitration around a year ago, the latest to take India to court under the Bilateral Investment Treaty (BIT)—BITs are designed to protect investments from other countries from unfair treatment or expropriation—is Cairn Energy Plc. While The Children’s Investment Fund Management also sought protection under a BIT in 2012, Nokia sought to invoke BIT last year. To that extent, the government’s attempt to narrow the ambit of the BIT, or to clarify any ambiguities in its application, is understandable. The latest draft BIT seeks to do precisely this, and public comments on its proposals have been invited till April 10.
The larger point about BITs, however, is that they are meant to be a form of comfort for investors. If investors are worried about the slow pace of justice in India, the BIT gives them fast-track justice vis-a-vis potential government action. Similarly, if it is Indian tax law that worries investors, particularly the way in which retrospective taxation legislation is being abused, this needs to be covered under the BIT. Most investors hoped that, particularly after the way the BJP spoke about tax terror during the election campaign, the retrospective tax would be struck off the statute. But it wasn’t. So, till such time that the government gathers the will to amend the statute and to stop mindless harassment by the taxman—investments brought in by Vodafone and Shell into their Indian subsidiaries were made the subject of large tax demands till they were struck down by the Bombay High Court—it is only fair that taxation remain actionable under the BIT. The latest draft, however, seeks to keep taxation issues outside the ambit of the BIT. All of which makes you wonder whether, as the Vodafone and Cairn cases go on, the government will simply turn around and say there can be no arbitration under the BIT since, according to the government’s interpretation, tax issues are not covered by BITs.
It gets worse. The draft BIT defines an ‘enterprise’ as one which has ‘made a substantial and long term commitment of capital in the Host state’, one which has ‘engaged a substantial number of employees’ and which has ‘assumed entrepreneurial risk’ along with having ‘made a substantial contribution to the development of the Host state through its operations’ … all of this is so subjective, it pretty much rules out application of the BIT for several players. Keeping out compulsory licences from the ambit of BITs means pharma majors are pretty much left without a cover.And firms need to approach all local courts/administrative bodies before they use the BIT—once again, this means they are subject to the delays of Indian courts. Given the government is trying to improve investor confidence in India, limiting the scope of the BIT seems counter-intuitive.