Nissan Dispute - Need for BIT revision

Why in news?

The Japanese automaker Nissan has initiated international arbitration proceedings against India.

How did the controversy evolve?

• In 2010, Nissan and its partner Renault, a French carmaker, set up a manufacturing plant in Oragadam, Chennai and invested a huge sum.
• To further promote the investment, the state government of Tamil Nadu assured several fiscal incentives.
• This was in the form of investment promotion subsidy (IPS) and value-added tax (VAT) refunds.
• It is learnt that the state government had paid the IPS dues.
• But the dispute arose over VAT refund amounting to Rs 2,900 crore along with Rs 2,100 crore in damages, interest and other costs.
• Nissan is thus seeking a compensation of around Rs 5,000 crore.
• Having failed on several rounds of negotiations with the State and Union governments, Nissan has initiated international arbitration proceedings against the Indian government.
• The claim is initiated under the investment chapter of the India-Japan Comprehensive Economic Partnership Agreement (CEPA).

How did the TN government respond?

• Double benefits - The TN government asserts that the car manufacturer could claim 14.5% VAT refund only for car sales within Tamil Nadu.
• Thus, TN government has rejected Nissan’s claim on the ground that the company was seeking VAT benefits for ‘exported’ cars as well.
• It has called this an attempt of claiming 'double benefits'.
• Period - Under the MoU signed between Renault-Nissan and TN government in February 2008, tax incentives are to be paid over a period of 21 years.
• But Nissan is trying to extract the subsidy in an accelerated fashion in less than 4 to 5 years.
• TN government raises concern that this could disrupt the government’s financial reserves.

What are the challenges in resolution?

• Tribunals - The regulation of tax in international investment law is a highly contested issue.
• This is because various tribunals have adopted different interpretative approaches to fix the liability of a host state.
• Anti-Arbitration - With the rise of international arbitration, anti-arbitration injunctions are increasingly resorted to.
• These injunctions are sought to restrain the initiation or continuation of arbitration proceedings.
• In the Nissan case, the government of Tamil Nadu has approached the Madras High Court to restrain the CEPA arbitration.
• However, similar cases reveal that international arbitral tribunal exercised its jurisdiction irrespective of domestic courts' order.
• Jurisdiction – The claim relies on protections provided under an international agreement, the CEPA, and not on any domestic law.
• Moreover, it is the TN government which is a party to the anti-arbitration injunction proceeding and not the government of India.

What are the gaps in the existing policy?

• In 2015, the Model Bilateral Investment Treaty (BIT) was promulgated in response to various investment claims initiated against India.
• However, most developed countries are hesitant to comply with new standards.
• This is because

1. the revised Model BIT discourages investors
2. specifies more regulatory risk by removing ‘most favoured nation’ clause
3. imposes a mandatory requirement of ‘exhaustion of local remedies’ for five years before resorting to an international forum for dispute resolution

• There were a series of investor-state disputes initiated under different investment protection agreements by various foreign investors in the recent period.
• Responding to this, India unilaterally terminated most BITs to which it was a Contracting Party.
• However, it is evidently becoming difficult for the country to avoid new disputes.

What is desired?

• International investment protection agreements play a key role in attracting foreign capital.
• Terminating BITs and the resultant absence of legal protections affects investor confidence in the Indian market.
• This would run contrary to government efforts on making India a manufacturing hub and addressing issues like unemployment.
• So a systematic revision of the Model BIT would be a practical solution.
• The government may also consider establishing a central repository for all relevant data and documents related to investments for better transparency and accountability.

Source: Financial Express