Cabinet to take up revamped model bilateral investment treaty soon
The Union Cabinet is set to take up a revamped Model Bilateral Investment Treaty (BIT), with the draft text finalised and sent for approval.
The new framework keeps taxation policy and domestic judicial processes outside the scope of investor-state disputes, protecting India's fiscal and judicial sovereignty.
It seeks to narrow the "red lines" that made the 2016 Model BIT unattractive to treaty partners, while also expanding protections for Indian companies investing abroad (outbound investment).
Negotiations under the updated framework are reportedly already under way with several countries, including the UK, Canada, Russia and Gulf partners.
The move follows a Budget 2025-26 announcement committing the government to overhaul the BIT framework to encourage sustained foreign investment.
Bilateral Investment Treaties (BITs) and Investor-State Dispute Settlement (ISDS)
A BIT is a treaty between two countries setting reciprocal terms for private investment by nationals/companies of one state in the territory of the other. Most BITs allow a foreign investor to sue the host government directly before an international arbitration tribunal (ISDS) if the state breaches treaty protections such as fair and equitable treatment or protection against expropriation, bypassing domestic courts.
Key Details
- India terminated most of its roughly 70 old-generation BITs after 2016, following a wave of ISDS claims (e.g., White Industries, Vodafone, Cairn Energy) that exposed sovereign risk from broadly worded treaty terms.
- The 2016 Model BIT replaced these, but required a foreign investor to exhaust local judicial and administrative remedies for a minimum of five years before approaching international arbitration — widely criticised by investors as excessive, which slowed new treaty conclusions.
- The 2016 Model BIT also excluded a Most Favoured Nation (MFN) clause and taxation measures from its scope, and defined "investment" narrowly (enterprise-based, not asset-based) to reduce exposure to speculative claims.
The revamped model reportedly retains the core sovereignty safeguards (no tax disputes in BIT scope, local remedies exhausted first) while shortening or easing the rigid five-year local-remedy window that had stalled negotiations, aiming to make the treaty framework workable enough to conclude pending BITs with partners such as the UK and the EU.
Outbound Investment Protection
As Indian companies increasingly invest overseas (outbound FDI), a Model BIT is also a tool to protect Indian capital abroad, not just to attract inbound investment. Expanding protections for outbound investment reflects India's shift from being purely a capital-importing country to also being a source of outward FDI, seeking reciprocal legal protection akin to what it offers foreign investors here.
Key Details
- Reciprocal protection under a BIT typically covers non-discrimination, protection against unlawful expropriation, and free transfer of funds/repatriation of profits.
- India's outward FDI has grown steadily, making Indian investors in sectors like pharma, IT and manufacturing stakeholders in how India's BIT network is designed.
The article notes the revamped BIT expands protections for outbound investments — a departure from the 2016 model's primarily inbound-investor focus, signalling India's dual role as both a host and a source of foreign investment.
Parliamentary/Fiscal Sovereignty and Taxation
Taxation is treated as a sovereign legislative function under Article 265 of the Constitution ("No tax shall be levied or collected except by authority of law"), exercised by Parliament and state legislatures. Keeping taxation outside BIT/ISDS scope prevents foreign investors from challenging India's tax measures (such as retrospective tax demands) before international arbitration panels, a lesson drawn directly from the Vodafone and Cairn Energy retrospective-tax arbitration cases India lost and paid compensation for after 2020's Taxation Laws (Amendment) Act, 2021 wound down the retrospective tax regime.
Key Details
- Article 265: taxation requires "authority of law," i.e., a statute passed by the competent legislature.
- The Taxation Laws (Amendment) Act, 2021 formally ended India's 2012 retrospective-tax provision, closing the Vodafone/Cairn-type disputes.
Excluding taxation from ISDS in the new BIT institutionalises the lesson from these disputes, ensuring future tax policy changes cannot be challenged as treaty violations.
- India's 2016 Model BIT required exhaustion of local remedies for at least five years before international arbitration could be invoked.
- India terminated around 70 BITs signed under the earlier (pre-2016) template after the wave of ISDS claims against it.
- The revamped BIT framework follows a commitment made in the Union Budget 2025-26.
- Reported ongoing BIT negotiations under the new framework include the UK, Canada, Russia and Gulf countries.