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Government of India BIT Policy Criticized by ASG Datar in Supreme Court Over Tax Exclusion
In a significant submission before the , offered a candid critique of the government’s approach to bilateral investment treaties (BITs), arguing that the termination of 58 such treaties may have been a strategic misstep. Datar’s remarks, made during a hearing that also touched upon the Centre’s stance on tax collection, underscored the tension between protecting and attracting long-term foreign capital. The ASG’s assessment carries weight not only for pending investment disputes but for India’s broader economic ambitions, including the “Make in India for the world” initiative.
The Argument in Court
Datar’s submissions came as part of a broader legal argument where he stated emphatically that “Centre does not want to collect even ₹1 in tax that is not due.” This assertion, though related to tax matters, dovetailed into his main thesis: that India’s is in need of urgent recalibration. He traced the country’s BIT history, noting that by India had entered into treaties with around 80 nations. However, following adverse in high-profile cases such as , , and , the government terminated 58 of those agreements. “In my view, in retrospect, it may not have been the correct decision,” Datar told the bench.
The ASG’s frank admission is notable because it comes from within the government’s own legal apparatus. He argued that the value of claims brought under the terminated treaties was relatively small when compared with the approximately $700 billion in foreign investment India received over 15 years. This framing suggests that the cost of defending against a handful of claims may have been outweighed by the overall investment inflows that the treaties helped facilitate.
India’s BIT Journey
India’s experience with BITs has been a rollercoaster. The country signed its first generation of treaties in the 1990s and early 2000s, largely based on European and Canadian model treaties. These provided broad protections to foreign investors, including , , and the right to . However, a series of adverse awards—most notably the award in , which held India liable for the slow judicial process in enforcing an arbitral award—prompted a wholesale review.
In , India released its own Model BIT, designed to rebalance the rights of investors and the state. The model introduced several features aimed at limiting exposure: it excluded taxation from the scope of the treaty, removed the , required investors to exhaust domestic remedies for five years before initiating , and adopted a narrow definition of investment. While these changes were intended to protect India from frivolous claims, they have been criticized by foreign investors and legal scholars as overly restrictive.
Critique of the 2016 Model BIT
Datar’s critique of the Model BIT was pointed. He singled out four features as particularly problematic:
Taxation Exclusion: By carving out tax measures entirely, the model BIT prevents investors from challenging discriminatory or arbitrary taxation that may amount to . Datar suggested this could deter investment in sectors where tax stability is critical, such as infrastructure and energy.
Removal of the MFN Clause: The MFN clause historically allowed investors to benefit from more favorable treatment granted to other foreign investors in third-party BITs. Its removal means that Indian BITs now stand alone, without the dynamic updating that MFN provided. Datar argued this makes India’s treaty network less attractive compared to competitors like China or Singapore.
Five-Year Domestic Remedies Requirement: Requiring investors to litigate in Indian courts for five years before accessing is seen as a significant barrier. Given the backlog in Indian courts, this effectively delays justice and increases costs. Datar noted that this provision may dissuade investors from bringing legitimate claims and could be viewed as a in itself.
Restrictive Definition of Investment: The Model BIT defines investment narrowly to exclude portfolio investments, short-term capital flows, and certain contractual rights. Datar argued that this definition is unduly restrictive and may not cover modern forms of investment, such as digital assets or intellectual property licenses.
Implications for “Make in India”
The ASG’s remarks have direct implications for the government’s flagship “Make in India” initiative, which aims to transform India into a global manufacturing hub. To achieve that goal, India needs not only domestic capital but also significant foreign direct investment (FDI) in sectors like electronics, automobiles, pharmaceuticals, and defense. Datar argued that robust BITs are a necessary precondition for attracting such investment, particularly from multinational corporations that require legal certainty.
“If we want to realize the ‘Make in India for the world’ objective, we need to signal to investors that their rights will be protected,” Datar submitted. He noted that countries like Singapore, the Netherlands, and China have modernized their BITs to remain competitive, while India’s model may have made it less attractive. The termination of 58 BITs, combined with the restrictive model, could push investors to choose alternative destinations in Southeast Asia or Latin America.
Legal Community Reaction
The legal community has taken note of Datar’s submissions. Investment arbitration practitioners have long argued that India’s current treaty regime is unbalanced. The ASG’s candid remarks may embolden calls for a new model BIT that strikes a better balance between investor protection and sovereign rights. Some experts suggest that India could adopt a “light-touch” model that retains core protections but includes carve-outs for , similar to the approach taken by Canada or the .
The Supreme Court’s reaction to Datar’s arguments will be closely watched. While the case in which these submissions were made is not directly about BITs, the ASG’s statements could influence future judicial interpretations of investment treaty obligations. Moreover, they may spur the government to revisit the model, especially as India negotiates new trade and investment agreements with the United Kingdom, the , and other partners.
Conclusion
ASG N Venkataraman Datar’s submissions before the Supreme Court mark a rare instance of a senior government law officer publicly questioning the wisdom of India’s BIT policy. By acknowledging that the termination of 58 treaties may have been a mistake and criticizing key features of the Model BIT, Datar has opened the door for a more nuanced debate about India’s approach to foreign investment. As the country seeks to boost its manufacturing base and integrate into global value chains, the legal framework for investment will be crucial. Whether the government heeds the ASG’s advice remains to be seen, but his words have already added momentum to the call for a new generation of balanced, investor-friendly treaties.
