Switzerland and Liechtenstein, two of the four members of the European Free Trade Association (EFTA), are advocating for a bilateral investment treaty (BIT) with India.
European Free Trade Association (EFTA)
- About: It is an intergovernmental organisation comprising Iceland, Liechtenstein, Norway, and Switzerland.
- Established in 1960 through the Stockholm Convention, it aims to promote economic cooperation and free trade in Europe.
- Member Countries: EFTA currently consists of Switzerland, Norway, Iceland, and Liechtenstein.
- They are not part of the European Union.
- India and EFTA: India is the EFTA’s fifth-largest trading partner after the European Union, the United States, Britain and China, with total two-way trade touching $25 billion in 2023.
- EFTA is one important economic block out of the three (other two – EU &UK) in Europe.
- Among EFTA countries, Switzerland is the largest trading partner of India followed by Norway.
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Background
- EFTA Trade Deal: The EFTA nations plan to invest USD 100 billion in India over the next 15 years as part of the newly signed Trade and Economic Partnership Agreement (TEPA).
- While the trade agreement focused on economic cooperation, a BIT was not initially part of the discussions.
- However, Switzerland and Liechtenstein are now pushing for a BIT to secure better investment protection for their companies operating in India.
About Bilateral Investment Treaty
- A Bilateral Investment Treaty (BIT) is a reciprocal agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state.
- The first BIT was signed by India on March 14, 1994.
- Some of the features of BIT:
- Investor Protection: BITs typically provide safeguards against unfair treatment, expropriation without compensation, and arbitrary regulatory changes.
- Non-discriminatory treatment: Ensures that foreign investors are treated fairly and transparently under the host country’s legal system.
- Most-Favored-Nation (MFN) Clause: Guarantees that investors receive treatment no less favorable than that given to investors from any other country.
- National treatment: Requires that foreign investors be treated on par with domestic investors in similar circumstances.
- Investor State Dispute Settlement (ISDS): Requiring investors to exhaust local remedies before commencing international arbitration etc.
Need for a Bilateral Investment Treaty (BIT) for Switzerland and Liechtenstein
- Suspension of MFN Clause in DTAA: In December 2024, Switzerland suspended the Most-Favoured-Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) with India.
- Impact of Indian Supreme Court Ruling: The suspension followed an Indian Supreme Court ruling, which stated that DTAA enforcement requires notification under the Income Tax Act.
- This led to higher taxes on Swiss companies operating in India, including Nestlé.
- Investment Protection and Stability: A BIT would provide Swiss and Liechtenstein investors with greater legal protection and predictability, addressing concerns over tax disputes and ensuring a stable investment environment.
India’s BIT Framework
- India canceled its old Bilateral Investment Treaties (BITs) based on the 1993 model due to adverse rulings in multibillion-dollar international disputes.
- To address this, India introduced a conservative 2016 model BIT that favoured the state over investors in investor-state disputes, including the “exhaustion of local remedies” clause.
- However, this model has been criticized by Western trade partners for being overly restrictive.
India’s Shift Towards Investor-Friendly BITs
- India has signaled a shift in its approach to BITs and the Union Budget highlighted plans to revamp the BIT framework
- Key changes expected in the revamped BIT include: Better protection for foreign portfolio investors Entity-based protection, and more investor-friendly investment norms.
Significance of Switzerland and Liechtenstein pushing for a BIT with India
- Strengthening India’s Global Position: A revamped BIT framework could boost Foreign Direct Investment (FDI), enhance India’s credibility, and set a precedent for future treaties with other nations.
- Shifting Global Investment Trends: Highlights India’s growing importance as an investment destination, encouraging other countries to seek similar treaties and promoting sustainable investment practices.
- Geopolitical Impact: Strengthens India-Europe ties and encourages India’s active role in multilateral trade forums.
- Addressing Tax and Legal Challenges: Provides clarity on tax and dispute resolution, potentially serving as a benchmark for global tax treaties.
- Enhanced Investor Protection: MNCs would benefit from stronger legal safeguards, reducing risks associated with investments in India.
- Improved Business Confidence: Clearer investment norms and dispute resolution mechanisms would boost business confidence among foreign investors.
Conclusion
A Bilateral Investment Treaty (BIT) between Switzerland, Liechtenstein, and India marks a significant step toward fostering stronger economic ties and addressing key concerns like tax disputes and investor protection.
Trade and Economic Partnership Agreement (TEPA)
- About: It is a Free Trade Agreement (FTA) signed between India and the European Free Trade Association (EFTA).
- Key Highlights of TEPA:
- First-of-its-kind FTA: India’s first agreement with four developed European nations.
- Investment Commitment: EFTA has pledged $100 billion in Foreign Direct Investment (FDI) over 15 years.
- Job Creation: TEPA aims to generate 1 million direct jobs in India.
- Chapters: TEPA comprises 14 chapters with a main focus on market access related to goods, rules of origin, trade facilitation, trade remedies, sanitary and phytosanitary measures etc.
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February 25, 2025
