The government decided to revise the text to specifically exclude tax-related matters after it was taken to international arbitration by Vodafone Group, unhappy with the retrospective levy of capital gains tax even after a favourable Supreme Court judgement. Photo: Reuters
The government decided to revise the text to specifically exclude tax-related matters after it was taken to international arbitration by Vodafone Group, unhappy with the retrospective levy of capital gains tax even after a favourable Supreme Court judgement. Photo: Reuters

New bilateral investment treaty text gets approval

The revised version will be used for the negotiation of existing and future BITs in economic agreements

New Delhi: The cabinet on Wednesday approved the revised text of the model bilateral investment treaty (BIT) excluding matters relating to taxation to avoid being dragged to courts by multinational companies unhappy over disputes with tax authorities.

Bilateral investment treaties are signed to protect foreign investors conducting business in India with a promise to provide a level-playing field and non-discrimination.

The revised Indian text for BIT will replace the existing model BIT and will be used for negotiation of existing and future BITs and investment chapters in comprehensive economic cooperation agreements, comprehensive economic partnership agreements and free-trade agreements, said a government statement.

“The essential features of the model BIT include an “enterprise" based definition of investment, non-discriminatory treatment through due process, national treatment, protections against expropriation, a refined Investor State Dispute Settlement provision requiring investors to exhaust local remedies before commencing international arbitration, and limiting the power of the tribunal to awarding monetary compensation alone," the statement said. “The model excludes matters such as government procurement, taxation, subsidies, compulsory licenses and national security to preserve the regulatory authority for the Government," it added.

The government decided to revise the text to specifically exclude tax-related matters after it was taken to international arbitration by Vodafone Group Plc, unhappy with the retrospective levy of capital gains tax even after a favourable Supreme Court judgement, under the India-Netherlands bilateral investment treaty.

In 2007, Vodafone International Holdings, a Dutch unit of the British telecom firm, bought the Indian business operations of Hutchison Telecommunications International Ltd through the sale of a Cayman Islands-based firm called CGP Investments Ltd, a unit of Hutchison.

The Indian tax department has estimated that Vodafone should have withheld part of the amount as tax while paying Hutchison. Vodafone and the tax authorities went to court to resolve the issue. The Supreme Court, in its judgement in January 2012, said the deal was not taxable in India. Subsequently, the government introduced retrospective amendments to laws to bring such indirect transfer of shares under the tax net. It also introduced a validation clause that made Vodafone liable to pay tax in India despite the apex court’s judgment.

Vodafone then proceeded with initiating arbitration under the bilateral investment protection agreement arguing that the retrospective amendment amounted to a denial of justice and a breach of the Indian government’s obligations to accord fair and equitable treatment to investors.

Others who have followed Vodafone’s cue to drag India to international arbitration include Nokia under the India Finland treaty and Cairn Energy Plc under the India-UK treaty.

Coal

The cabinet also approved a policy framework for development of underground coal gasification (UCG), a better method compared to conventional mining methods.

UCG is a method of extraction of energy from coal and lignite resources which are otherwise regarded as uneconomical to work through conventional mining methods.

“A policy on the lines broadly similar to the existing policy for coal bed methane development on revenue sharing basis will be adopted for offering the blocks through competitive bidding. Development of UCG is envisaged to provide for energy security," said an official statement.

The statement said “an inter-ministerial committee under the coal ministry will be responsible for identification of the areas, deciding about blocks to be put to bidding or awarding them to PSUs (public-sector units) on nomination basis."

“In the perspective of next two years some explored blocks will be identified for offer. Subsequently, additional blocks will be identified for offer in the long term," it added.

The coal ministry may also engage a consultant for development of the contract document while for the development of bid documents, work programme, conducting the bidding process, evaluation of bids, monitoring and process protocols, the Central Mine Planning and Design Institute Ltd will be the nodal agency.

Separately, the Cabinet Committee on Economic Affairs gave its approval for allotting coal mines to central and state PSUs for sale of coal especially to medium, small and cottage industries under the provisions of the Coal Mines (Special Provisions) Act, 2015.

The release noted that this is expected to enhance domestic production of coal to meet the national demand thus reducing import. The coal bearing states will get additional revenue from such coal mines equal to the amount of royalty on the quantity of coal produced on a monthly basis during the lease period of the mine as well as one-time upfront payment which is 10% of the intrinsic value of coal in the mine in three instalments in the first year of allotment.

The demand for coal is much higher than the current level of production. During the year 2014-15, as per provisional data, as against a total consumption of 825.6 million tonnes, the domestic production of coal was 612.4 million tonnes. The gap between consumption and domestic supply is met through imports.

Other decisions

The cabinet also approved the changes brought in the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Bill, 2015, which was introduced in the Lok Sabha on 7 December.

The bill, which replaced an ordinance promulgated in October, clarified that it would apply to pending cases. The bill said that all suits above the value of 1 crore would be transferred to commercial courts. Once passed, this could shift the burden of pending cases for quicker disposal.

According to the government, it would also reduce the pressure on two-judge benches of the high courts.

The bill was introduced based on the 253rd report of the Law Commission, which were intended for speedy disposal of commercial cases. Delays in the judicial process act as a disincentive for foreign investors, according to the commission.

The 2015 bill on commercial courts was passed by the Lok Sabha on Wednesday.

Mayank Aggarwal, Shreeja Sen and Nikita Mehta contributed to this story.

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