\n<\/p>\n
Taxation, a fundamental sovereign function<\/a>, is essential to promote social policy goals, regulate behaviour, and raise revenues, which form the foundation of the international legal order. States derive the power to impose taxes on citizens and aliens alike from their respective constitutions. However, states voluntarily circumscribe these sovereign powers by entering into International Investment Agreements (IIAs)<\/a> to incentivise the inflow of foreign capital. By providing a stable, predictable, and secure legal environment, states reduce inefficient risks by voluntarily constraining their own regulatory discretion to encourage investment. The sovereign power of taxation enjoyed by the state thus conflicts with the protections enjoyed by foreign investors under Bilateral Investment Treaties (BITs) in international investment law.<\/p>\n As of 31st December 2025, thirty Investor-State Dispute Settlement (ISDS) claims<\/a> had been brought against India, making it one of the most frequent respondent states among developing economies, with six cases still pending. In 2011, the first adverse award was passed against India in White Industries v India<\/a>, triggering a strong counter-reaction. India unilaterally terminated close to 75 BITs and initiated a significant conceptual shift towards de-legalisation \u2014 moving decision-making away from international treaty frameworks towards domestic legal systems. This culminated in the adoption of the Model BIT in 2016<\/a>, developed as a response to the losses and costs imposed in high-stakes tax disputes such as Vodafone<\/a> and Cairn Energy<\/a>. The Model BIT 2016 marks a radical protectionist framework through which India sought to reclaim the regulatory space it believed it had lost in these cases. This paper argues that Article 2.4(ii) of the Model BIT<\/a>, by explicitly excluding taxation measures and their enforcement from the scope of arbitral review,\u00a0\u00a0 represents a disproportionate reaction, one that restructures the balance decisively in favour of host state regulatory powers and, in doing so, eliminates the rule of law architecture that international investment law was designed to preserve.<\/p>\n Tax-related ISDS cases constituted approximately 15% of 1,190 treaty-related cases<\/a> between 2020 and 2021. Excluding taxation measures from investment treaties has become increasingly common<\/a>, particularly among capital-exporting states, as a mechanism to protect states from claims related to tax measures. While theoretically designed to function as instruments protecting fiscal sovereignty by exempting taxation measures from the scrutiny of international tribunals, empirical research has revealed a significant gap between treaty text and arbitral practice. IIA carve-out provisions have effectively barred only one-fifth of tax-related ISDS claims<\/a>. The risk these carve-out provisions carry, however, cuts both ways, empowering the host state to unilaterally determine whether a particular measure constitutes taxation. This not only perpetuates the gap, but actively limits the protections available to foreign investors against regulatory abuse camouflaged as tax policy.<\/p>\n Most nations have found India\u2019s revised investment stance quite radical. Many investment treaties leave it to tribunals to define \u201ctax,\u201d \u201ctaxation measure,\u201d and \u201ctaxation policy,\u201d and to interpret when specific tax carve-outs apply. To determine whether something constitutes a tax measure, the tribunal in Nissan Motor Co Ltd v Republic of India<\/a> applied the test of who, what, and why<\/em> \u2014 who imposes the measure, what its qualitative nature is, and why it is imposed, to determine its policy effect in the host country. This framework creates a consistent and predictable method for balancing state police powers against investor protection. Article 2.4(ii) intentionally bypasses this corrective by allowing the state to effectively carve its way out of treaty obligations, ousting the gatekeeping functions established by international jurisprudence.While general tax carve-outs are common in many international treaties, India\u2019s Model BIT goes a step further. If the host state decides that a particular measure constitutes taxation, it becomes non-justiciable in any arbitral forum, effectively barring foreign investors from approaching any tribunal to review whether a measure qualitatively qualifies as a tax measure at all.<\/p>\n Excluding taxation measures entirely leaves foreign investors with no avenue to challenge such measures under any circumstances. By granting unilateral power to the state to oust ISDS jurisdiction, India removes what Ernst-Ulrich Petersmann describes as the critical \u201cvisible hand\u201d necessary to recognise international obligations<\/a> in investment matters alongside the invisible hand of market competition. The tribunal in EnCana v Ecuador<\/a> highlighted this risk that states can design arbitrary measures under the nomenclature of taxation that are indirectly confiscatory and expropriatory in nature. Such exclusion also undermines the predictability, security, and legal certainty that international investment law aims to secure. By removing judicial gatekeeping, India risks inducing a regulatory chill, reducing the overall welfare of both contracting parties by deterring capital flows through the absence of legal certainty.<\/p>\n The unilateralist architecture of Article 2.4(ii) sits in sharp contrast to the cooperative institutionalism found in other significant treaties such as the Energy Charter Treaty (ECT)<\/a> and the North American Free Trade Agreement (NAFTA)<\/a>. While India\u2019s model ousts international jurisdiction by nomenclature, these frameworks establish procedural mechanisms through which fiscal sovereignty is reconciled with the international rule of law.<\/p>\n Under the referral mechanisms in these models, where a foreign investor alleges that a domestic taxation measure constitutes unlawful expropriation, the dispute is first referred to the competent tax authorities of both the host and investor states, codified under Article 2103(6) of NAFTA (Taxation)<\/a>. Only when the competent authorities of both states fail to agree to consider the issue, or having agreed to consider it, fail to determine that the measure is not an expropriation within six months of such referral, does the investor\u2019s right to submit the claim to arbitration under Article 1120 arises.\u00a0\u00a0 If both parties agree that the measure does not constitute expropriation, investors are barred from pursuing further ISDS claims. This cooperative model also provides a safety valve absent from India\u2019s mechanism. If authorities fail to reach consensus within the stipulated period, the arbitral tribunal regains jurisdiction. In four NAFTA cases against Mexico<\/a>, investors proceeded to arbitration precisely upon such failure to reach consensus.<\/p>\n Beyond bilateral mechanisms, the UN Convention on Tax<\/a> has proposed amendments to Article 25 of the UN Model Tax Convention, seeking to move tax disputes away from general investment tribunals towards specialised state-to-state mechanisms. This addresses the concern that private arbitrators may lack the fiscal expertise that tax treaty disputes demand, often producing inequitable and unpredictable outcomes \u2014 as seen in the multi-billion dollar liability imposed on India in Cairn Energy<\/em><\/a>. This multilateral approach resolves the tension by channeling tax issues through tax specialists, protecting national finances while preserving meaningful investor recourse.<\/p>\n Safeguarding fiscal sovereignty while attracting global investment requires a holistic shift in India\u2019s approach, from a defensive, unilateral position to a more cooperative legal framework. Article 2.4(ii) in its current form fails entirely to distinguish between the genuine exercise of sovereign regulatory powers and capricious state behaviour dressed as taxation.<\/p>\n A balanced framework would involve replacing the unilateral model with a referral mechanism or a measurable \u201cpublic interest\u201d benchmark, ensuring that the state remains accountable for capricious conduct without losing its legitimate power to tax. The absence of universal and systemic criteria to evaluate policy measures exacerbates the imbalance in the current ISDS system, where the right to regulate is conflated with public interest, leaving investors in precarious positions where anticipation or assessment of regulatory risk becomes nearly impossible. Applying public interest as a measurable criterion would allow the state to balance Article 2.4(ii) read with Article 23.1 of the Model BIT<\/a>, which mandates high deference to domestic policies without tilting the scale disproportionately in favour of the host state. A measurable benchmark would permit regulatory changes where they bear a reasonable connection to legitimate state goals and are proportionate in their effect on foreign investors.<\/p>\nII. Tax Carve-Outs in International Investment Law \u2014 The Standard Model and Its Empirical Failure<\/strong><\/h2>\n
III. Deconstructing Article 2.4(ii)<\/strong><\/h2>\n
IV. Comparative Perspective<\/strong><\/h2>\n
V. Towards a Balanced Framework<\/strong><\/h2>\n
VI. Conclusion<\/strong><\/h2>\n