Balancing Foreign Investment with Tax Sovereignty: BITs

The Lift Line

“As India moves to formalise its BITs, what can be afforded to foreign investors is the right to find justice without impinging on the rights of other taxpayers, particularly domestic institutional investors.” (Suranjali Tandon, The Indian Express)

Why This Editorial Matters for Your Exam

This is a signed opinion column by Suranjali Tandon in The Indian Express, published on 17 October 2026. The argument is hers, not the newspaper’s. She defends one feature of India’s investment treaty policy: keeping taxation out of bilateral investment treaties (BITs).

This is the third piece on BITs on our pages this month. An earlier Indian Express editorial covers the Model BIT and FDI, a Hindu editorial covers the five-year local-remedies rule, MFN, counterclaims and the recent treaties, and a second Hindu editorial covers the 2021 law that settled the retrospective tax demands. This page covers only what is new: the tax carve-out in the treaty text, forum shopping between tax treaties and investment treaties, and what the Cairn and Vodafone awards actually decided.

GS Paper 2: bilateral agreements involving India and affecting its interests. GS Paper 3: investment models; mobilisation of resources (taxation); effects of policy on foreign investment.

In the news: As India moves to formalise its BITs, the author argues that India’s explicit exclusion of tax from them “is not atypical”, and that its state-to-state mutual agreement procedure for tax “could be further bolstered”.

Background and Context

Two kinds of treaty, two kinds of dispute

A double taxation avoidance agreement (DTAA) settles tax disputes between the two governments through the mutual agreement procedure (MAP); some also provide mandatory binding arbitration (MBA). A BIT gives a foreign investor a different route. In the words of the International Institute for Sustainable Development (IISD), investor-state dispute settlement (ISDS) “is an arbitration process distinct from the dispute resolution mechanisms included in tax treaties”. The investor, not its government, brings the claim against the host state.

Forum shopping is what happens when a tax dispute could go to either route and the investor picks the investment treaty, with its broader standards such as fair and equitable treatment (FET).

The carve-out in India’s model text

India’s Model BIT text was issued by the Department of Economic Affairs on 28 December 2015; the press and our earlier page often call it the 2016 model. Article 2.4 reads:

“This Treaty shall not apply to: ... (ii) any law or measure regarding taxation, including measures taken to enforce taxation obligations. For greater certainty, it is clarified that where the State in which investment is made decides that conduct alleged to be a breach of its obligations under this Treaty is a subject matter of taxation, such decision of that State, whether before or after the commencement of arbitral proceedings, shall be non-justiciable and it shall not be open to any arbitration tribunal to review such decision.”

The second sentence matters most. It is not enough that tax is excluded; the host state itself decides whether a dispute is about tax, and no tribunal can review that decision.

The model also makes the investor try India’s own courts first. Under Article 15.2, arbitration can begin only after the investor has pursued domestic remedies “for at least a period of five years from the date on which the investor first acquired knowledge of the measure in question”.

The two awards behind the policy

Both cases arose from the Finance Act 2012, which received assent on 28 May 2012 and amended Section 9(1)(i) of the Income-tax Act, 1961, reaching back to indirect transfers made before it.

The Cairn tribunal also relieved the claimants of the tax demand for assessment year 2007-08.

The domestic settlement

The background is on our Hindu editorial page on inbound investment. The Taxation Laws (Amendment) Act, 2021 (No. 34 of 2021, assent in August 2021) added provisos to Explanation 5 of Section 9(1)(i) for indirect transfers made before 28 May 2012. Relief came on conditions: the taxpayer had to withdraw appeals and any “proceeding for arbitration, conciliation or mediation” and give an undertaking waiving further claims. Amounts paid were to be refunded, “but no interest under section 244A shall be paid on that amount”.

Where the treaties stand

• India-UAE BIT: signed on 13 February 2024 at Abu Dhabi and in force from 31 August 2024. The Ministry of Finance lists a “Scope carve out for measures such as those related to taxation”, and ISDS “with mandatory exhaustion of Local remedies for 3 years”.
• India-UK: no BIT has been signed. Talks were reported in April 2026 to have stalled over this very issue, an official saying “we want a complete carve-out of taxation”. The India-UK trade deal is a trade agreement, not a BIT.
• The revised Model BIT is awaiting Cabinet approval: the finance ministry was reported on 25 September 2026 to have sent the draft note to the Cabinet Secretariat. No draft text has been made public, according to IISD (9 September 2026).

The Analysis

1. When assurance becomes a constraint. BITs, the author writes, “assure a steady regulatory framework”, but “those very assurances often turn into high standards of protection that investors resort to in order to curtail sovereign regulatory powers”. Her test case is tax. She asks what happens when standards such as fair and equitable treatment “apply asymmetrically, that is, when there is no reciprocal protection of the tax base”. The investor gets a shield against the state; the state gets nothing back for its tax base.

2. Rights that domestic taxpayers do not have. Treaty arbitration in tax matters gives foreign investors a remedy beyond what domestic investors get, the author argues, and it is “incompatible with the position India has held at multiple fora that arbitration in tax matters is not permissible”. That is the thinking behind Article 2.4.

3. Forum shopping, in figures. The author’s point is that India’s carve-out is not unusual, “as many countries grapple with forum shopping”. Her figures, in her words: “In the last decade, 134 tax-related ISDS cases were admitted, and tax treaties were available for dispute resolution in 53 per cent of these. Yet the claimants, mostly from Western Europe and North America, chose to invoke BITs.” The column names no source for these numbers.

Our check, not the author’s argument. IISD’s August 2026 report gives figures that differ in period and in meaning, so quote them as IISD’s:

IISD also cites UNCTAD (2022): between 2000 and 2021, tax-related claims were “about 15% of the 1,190 publicly known treaty-based ISDS cases”, and almost 70 per cent of them began between 2010 and 2021. On IISD’s numbers, a tax treaty existed in most cases, yet the claimant chose the investment treaty. Note the difference: the column’s “53 per cent” is of all 134 cases; IISD’s 53% is of the cases that had a tax treaty.

4. Expropriation is a different question. The author accepts that investors’ fear of expropriation has history behind it: “The fears are not unfounded”. But she asks how far such standards should reach, “especially since the remedy for change in ownership of assets is not interchangeable with policy sovereignty”. Compensating an investor whose asset is seized is one thing; reviewing a country’s tax law is another.

5. What Cairn and Vodafone show. Both disputes began as tax disputes, and both tribunals ruled for the investor. In Cairn, the tribunal declared that it had jurisdiction and found a breach of fair and equitable treatment. On our reading, that is why Article 2.4 goes beyond excluding tax and makes the state’s own decision that a matter is tax non-justiciable. The awards also show the cost of the original problem. The dispute arose from a law that reached back in time, and it was settled in the end by domestic law: the 2021 Act, which gave relief on condition that the claims were dropped.

6. MAP over arbitration, and no fast track. For tax, the author argues, MAP “would in fact be relatively less time-consuming than alternative judicial processes”, and India’s state-to-state practice under it “could be further bolstered”. On the time an investor must spend in domestic courts first, she notes that the UAE treaty’s three years is “more efficient than the 2015 model that allows for five years”. But she warns that a shorter timeline for foreign investors “should not delay justice for domestic investors or set up a fast-track mechanism based on the nationality of investors”.

7. The world is moving the same way. In the author’s words, “The standard practice is evolving across the world as the UN model is being revised to exclude tax from disputes covered by processes stipulated by investment and trade agreements”, and India’s explicit exclusion of tax “is not atypical”. For context, the UN Tax Committee released the text of the 2025 UN Model Tax Convention on 28 August 2026, with additions to Article 25 on the relationship between tax treaties and other agreements (IBFD, August 2026).

8. How much do BITs matter? The author ends on a modest note: “Empirical evidence is not overwhelming to support that BITs can shift the mood of foreign investors substantially. But what it can do is to comfort the investor distracted by higher relative returns.” On her reading, a BIT reassures investors; it is not why they come.

Data and Institutions Vault

Prelims-grade facts:

India’s treaty text:

• Model BIT, Article 2.4(ii): the treaty does not apply to “any law or measure regarding taxation”; the host state’s decision that a matter is taxation is non-justiciable.
• Model BIT, Article 15.2: domestic remedies for at least five years, counted from when the investor first knew of the measure, before arbitration.
• India-UAE BIT (in force 2024): scope carve-out for taxation; ISDS only after 3 years of local remedies.

The awards:

• Cairn: UK-India BIT; PCA Case No. 2016-7; UNCITRAL Rules 1976; seat The Hague; breach of fair and equitable treatment, Article 3(2).
• Vodafone: Netherlands-India BIT; unanimous award; a Rs 22,100 crore demand rejected; India applied to the High Court of Singapore to set it aside (PTI).

The domestic fix:

• Taxation Laws (Amendment) Act, 2021: No. 34 of 2021, assent 13 August 2021; provisos to Explanation 5 of Section 9(1)(i), Income-tax Act, 1961.
• Relief terms: withdraw appeals and arbitration, waive further claims; refunds without interest under Section 244A.

The data:

• The column’s figures: 134 tax-related ISDS cases in the last decade; tax treaties available in 53 per cent (no source named).
• IISD database (our check): 134 cases, 2000s to the present; a double taxation agreement in 80%; the disputed tax covered in 53% of those.
• 2025 UN Model Tax Convention: text released by the UN Tax Committee on 28 August 2026; additions to Article 25 on tax treaties and other agreements.
• UNCTAD (2022), cited by IISD: tax-related claims were about 15% of 1,190 known treaty-based ISDS cases, 2000 to 2021.
• MAP = mutual agreement procedure (state to state, under tax treaties); MBA = mandatory binding arbitration.

⚠️ Watch the trap: The revised Model BIT awaits Cabinet approval, so the 2015 text still applies. The India-UK deal is a trade agreement; there is no India-UK BIT. The column says tax treaties were available in 53 per cent of 134 cases; in IISD’s data a tax treaty existed in 80% of them, and 53% is the share of those where the disputed tax was covered.

The Debate

How to Think About This

Ask three questions of any tax-and-treaty dispute:

1. Who decides what is tax? Under Article 2.4, the host state does, and no tribunal can review it. That is the heart of the carve-out and of partners’ objections to it.
2. Which forum? A tax treaty’s MAP is government to government; ISDS is investor against government. Forum shopping means choosing the second when the first was available.
3. For whom? A remedy only foreign investors can use, or a faster timeline only they enjoy, treats taxpayers unequally by nationality.

Our reading of Cairn and Vodafone: the dispute began with a law that reached back in time, and it ended with a domestic law. Predictable tax law protects both the investor and the tax base; a treaty clause can only decide where the quarrel goes.

Diagram-in-Words

Takeaway Box

• The argument (the author’s): India’s exclusion of tax from BITs “is not atypical”; MAP “could be further bolstered”; give foreign investors justice, but no fast track by nationality.
• The text: Model BIT Article 2.4(ii) excludes taxation and makes the host state’s tax decision non-justiciable.
• The awards: Cairn (UK-India BIT, The Hague, about US$ 1.23 billion plus interest) and Vodafone (Netherlands-India BIT, Rs 22,100 crore demand rejected).
• The data: the column gives 134 cases and 53 per cent (no source named); IISD’s check: a tax treaty in 80% of its 134 cases, the tax covered in 53% of those.
• Where it stands: the revised Model BIT awaits Cabinet approval; no India-UK BIT.

Revision Flowchart

Sources: The Indian Express, Suranjali Tandon, “Balancing foreign investment with tax sovereignty”, 17 October 2026; Department of Economic Affairs, Model Text for the Indian Bilateral Investment Treaty, 28 December 2015 (archived copy); PIB, Ministry of Finance, India-UAE BIT comes into effect (October 2024); IISD, Preserving Tax Sovereignty (August 2026); Cairn Energy PLC and Cairn UK Holdings Limited v. India, PCA Case No. 2016-7, Award (December 2020); CBDT, note on the Vodafone award (September 2020); The Taxation Laws (Amendment) Act, 2021 (No. 34 of 2021); Outlook Business, India-UK investment treaty talks (April 2026); Outlook Business, revised Model BIT awaiting Cabinet (September 2026); UN Secretariat note on the UN Model Tax Convention 2025; IBFD, release of the 2025 UN Model Tax Convention (August 2026); IISD, on the revised Model BIT (September 2026); PTI, Vodafone award challenge in Singapore (February and August 2021)

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