On September 25, 2020, the Permanent Court of Arbitration at the Hague ruled in favour of the telecom giant Vodafone in a $2 billion (Rs. 20,000 crores) retrospective tax dispute against India, initiated under the India-Netherlands Bilateral Investment Treaty (BIT). The Tribunal ruled that the Government’s imposition of tax liability on Vodafone is in breach of Article 4.1 of the India-Netherlands BIT providing for fair and equitable treatment (FET). India had 90 days to file an appeal against the aforesaid decision in a Singapore appeals court, which it did in the month of December 2020, quite close to the deadline. The Indian Government has challenged the award on the ground that India has the sovereign right of taxation on which private individuals cannot decide and that the matter falls outside the domain of a bilateral investment treaty rendering it beyond the jurisdiction of international arbitration. The Government apparently thought it fit to challenge the award as it had questioned the right of a sovereign to levy tax and not on the tax demand per se.
The above stance taken by the Government in the appeal raises issues pertaining to the objective of standard bilateral investment treaties, which are generally titled as agreements for promotion and protection of investments, and contain provisions on ‘protection’ of investment. A good bilateral investment treaty, which is necessary for adequate FDI inflows, is characterized by ensuring a balance between the competing interests of the foreign investor and the host country. India’s previous BIT Model of 2003 was known to be excessively investor-friendly, giving preference to investment protection over the State’s right to regulate. On the other hand, the 2016 Indian BIT Model is drastically different in form, structure, content, and accords increased importance to the State's regulatory powers. India is now signing BITs either based on the 2016 Model, which has a highly restrictive ITA (Investment Treaty Arbitration) provision, or which do not have ITA provisions at all, such as the India-Brazil BIT.
One wonders as to why there is this sudden and significant shift in the Indian Government’s approach towards investment treaty disputes and whether or not an ideal balance between protection of foreign investment and the State’s regulatory powers is achievable. What is the nature of bilateral investment treaties, and do they inherently tend to unduly restrict the sovereign space of host countries? This paper attempts to find answers to these questions through an informative study of BITs and the 2016 Indian BIT Model in particular.