Revised Model Bilateral Investment Treaty: India Keeps Taxation Out and Keeps the Local Remedies Rule
A revised Model Bilateral Investment Treaty (BIT) (the standard template India uses to negotiate investment treaties) is expected to go to the Union Cabinet for approval soon. The Finance Ministry has circulated a Cabinet note on it.
Taxation will stay outside the BIT framework. The government's position is that Parliament has the sovereign right to decide tax policy, so tax disputes cannot be taken to international arbitration under a BIT.
Foreign investors will still have to exhaust local remedies (first use Indian courts and legal options) before they can go to international arbitration.
India is negotiating BITs with four to five countries, including Canada, Russia and the United Kingdom.
The revised model will guide new BITs and the investment chapters of bigger trade deals. The last model text was finalised in 2015, and investors had seen it as restrictive.
Bilateral Investment Treaty (BIT) and India's Model BIT (2016)
A Bilateral Investment Treaty (BIT) is an agreement between two countries to protect each other's investors. It promises fair and equal treatment, and payment of compensation if the host country takes over an investment. If the host country breaks these promises, the investor can take the case to international arbitration. India's "Model BIT" is the template it starts from in every negotiation. The current template was approved by the Union Cabinet in December 2015 and is often called the 2016 Model BIT.
The revised model is the result of the Budget 2025-26 promise. It keeps two of India's firm lines from the old model, the tax carve-out and the local-remedies rule, while aiming to reassure investors. It will be the base for talks with countries like the UK, Canada and Russia, and for India's investment chapters in bigger trade deals.
Investor-State Dispute Settlement (ISDS)
Investor-State Dispute Settlement (ISDS) is a system that lets a foreign investor sue the government of the country where it has invested. The case does not go to that country's ordinary courts. It goes to a panel of international arbitrators, called an arbitral tribunal. The right to use ISDS comes from a treaty such as a BIT.
The Vodafone and Cairn cases showed that tax decisions could be challenged through ISDS under old BITs. That is why the revised model keeps taxation fully out of the treaty and keeps the local-remedies rule. An investor must first go through Indian courts, and only then can it use international arbitration.
- Revised Model BIT: Cabinet note circulated by the Finance Ministry; Cabinet approval awaited
- Taxation kept outside BIT scope; local remedies must be exhausted before arbitration
- BIT negotiations underway with 4-5 countries, including Canada, Russia and the UK
- Previous model text: finalised December 2015 (often called the 2016 Model BIT); local-remedies wait of 5 years
- UAE BIT (2024) and Israel BIT (2025): local-remedies wait cut to 3 years
- 77 older BITs terminated by India since 2016
- Vodafone award: 25 September 2020 (India-Netherlands BIT); Cairn award: 21 December 2020 (India-UK BIT, about USD 1.2 billion)
- Taxation Laws (Amendment) Act, 2021 ended retrospective tax demands for pre-May 2012 indirect transfers
- India is not a member of the ICSID Convention (1965)