India’s bilateral investment protection treaties are becoming faster to invoke, yet less useful for the specific category of dispute most likely to arise.
The bilateral investment promotion and protection agreement with Saudi Arabia, cleared by the Union Cabinet in late September 2026, requires foreign investors to pursue domestic legal remedies for two years before initiating international arbitration. That provision marks the shortest local-remedies threshold among India’s modern treaties, continuing an observable trend: five years under the 2015 Model BIT, three years in the 2024 agreement with the United Arab Emirates, and now two with Riyadh.
That reads as liberalisation until you read the revised draft Model BIT now with Cabinet, which excludes taxation measures from investment protection on the stated principle that sovereign tax policy is non-justiciable.
The procedural waiting period is contracting, but the substantive coverage is shrinking with it. An investor reaches international arbitration sooner, but on a circumscribed set of claims that excludes the exact battleground where India has historically faced adverse awards.
The Tax Carve-Out: Institutional Memory in Draft Form
The exclusion of tax measures from investment protection is not an administrative afterthought; it is the product of three decades of treaty practice.
India’s landmark investor-State losses both arose from tax measures. The Cairn Energy award in December 2020 ordered India to pay approximately $1.2 billion after retrospective capital gains tax amendments were held to breach fair and equitable treatment under the 1994 India-UK BIT. The Vodafone award, decided three months earlier under the 1995 India-Netherlands BIT, arose from the same retrospective legislation. Both claims were brought under first-generation treaties that lacked explicit taxation carve-outs.
India responded in its 2015 Model BIT by terminating older pacts and inserting Article 2.4(ii), which excluded taxation measures from the treaty’s application. Footnote 1 to Article 2.4 made that exclusion self-judging, specifying that the host State’s determination that a measure is tax-related shall be non-justiciable and shielded from arbitral review. The revised draft Model BIT maintains that exclusion of taxation measures from scope.
An investor welcoming the two-year local remedies provision must recognise what it buys: faster access to an arbitral tribunal that, under India’s current treaty model, will decline jurisdiction over any dispute touching domestic revenue policy.
The Domestic Exit Trap: GAAR and the Fall of the TRC
The consequence of that carve-out becomes stark when read against changes in domestic tax jurisprudence.
On 15 January 2026, the Supreme Court delivered its judgment in Authority for Advance Rulings (Income-tax) v. Tiger Global International II Holdings (2026 INSC 60; Civil Appeal No. 262 of 2026). A bench of Justices J.B. Pardiwala and R. Mahadevan allowed the Revenue’s appeals against Tiger Global International II, III, and IV Holdings, holding that:
- A Tax Residency Certificate (TRC) does not preclude tax authorities from examining treaty abuse, conduit structures, or beneficial ownership and control. The Delhi High Court had erred in setting aside the Authority for Advance Rulings’ threshold rejection of the applications under Section 245R(2)(iii) of the Income-tax Act, 1961.
- The General Anti-Avoidance Rules (GAAR) under Chapter X-A apply to tax benefits arising on or after 1 April 2017, even where the underlying investment predated that date.
The interplay between these two legal developments reshapes cross-border risk. The tax treaty network no longer guarantees capital gains protection on the strength of a residency certificate alone, because Indian assessing officers are empowered to scrutinise commercial substance under GAAR. Simultaneously, the investment treaty network is drafted so that any dispute arising from that tax assessment is excluded from international arbitration.
These regimes are negotiated by different ministries and litigated by different practices, but they point in the same commercial direction: the elimination of external review over Indian tax assessments.
What the Two-Year Threshold Delivers
The procedural relaxation remains a genuine commercial improvement for non-tax disputes.
Under the framework cleared for the Saudi agreement, an investor cannot bypass domestic courts; international arbitration becomes available only after pursuing domestic remedies for two continuous years. For non-tax grievances such as arbitrary licence revocations, regulatory expropriation, or discriminatory enforcement, shortening that pursuit threshold from five years to two reduces the risk of protracted litigation in domestic courts.
Two years in an Indian commercial court or tribunal is a manageable litigation holding pattern. An investor challenging an administrative order or a concession dispute is meaningfully better off than under the 2015 framework.
The limitation is not that the treaty is ineffective; it is that its protections apply strictly to regulatory and operational disputes, while excluding tax risk entirely.
Entry and Exit No Longer Backstop Each Other
The protections an inbound investor relies on at entry and the remedies available at exit are governed by distinct instruments.
At entry, private equity sponsors and multinationals historically structured investments through the intermediary holding jurisdictions of Mauritius, Singapore and the UAE, evaluating Double Taxation Avoidance Agreement (DTAA) capital gains exemptions alongside bilateral investment treaty protections.
At exit, following Tiger Global, a TRC no longer precludes scrutiny of commercial substance, beneficial ownership, and control under GAAR. If treaty relief is rejected, the revised investment treaty model ensures there is no international arbitral forum to review the assessment.
The diligence inquiry for General Counsel and investment committees has changed shape. The operational question is no longer whether an investment holding structure qualifies for treaty protections on paper. It is whether the sponsor is prepared to litigate any dispute over exit taxation entirely within the Indian appellate system, with no recourse to international treaty arbitration behind it. That forum lock-in is no longer an oversight rather an intentional design of the modern Indian treaty network.
That development relocates work. The Vodafone and Cairn era made investment treaty arbitration a commercially significant part of a law firm’s India offering, and it was a practice that could be run from London, Singapore or Paris. If tax sits outside the treaty, that practice loses its highest-value India use case and the dispute it would have heard is now resolved through the Indian appellate chain, which cannot be served from offshore.
What replaces it requires a reading. Assessing whether a structure will survive exit means reading a double taxation agreement, Chapter X-A and a bilateral investment treaty together and arriving at one answer. That reading is most relevant while the structure is still being chosen, which is also the point at which none of the three instruments has yet produced a dispute. It is understandable if no single practice desk therefore has a reason to commission it.
Lawfinity Solutions advises international law firms on cross-border legal market positioning. If the India corridor is a live question for your firm, we would be interested in a conversation. Lawfinity works with one firm per jurisdiction. Engagements begin with a single conversation about your firm’s current position and where the corridor question is live for you. Write to Prachi Shrivastava
