An international arbitration tribunal, in the dispute between Vodafone and India, recently held that the measure of retrospective taxation, which was in challenge, contravened India’s assurances to investors under the India-Netherlands Bilateral Investment Treaty (“BIT”). The provision in question was enacted by the Central legislature and hence no constitutional complications arise.
However, what if the provision was enacted by a state legislature, such as one in the Tamil Nadu VAT legislation that was the subject of the arbitration between Nissan Motors and India? Will the quasi-federal structure of the Indian Constitution permit the Central executive to implement a BIT award by controlling the legislative powers of the states? This issue needs to be answered keeping in mind the broader objective of entering into BITs in the first place, i.e. to attract foreign investment.
Such an objective can only be achieved by respecting and implementing the mandates of an award passed against India. For this purpose, there is a need to iron out the constitutional creases that exist for implementing BIT awards. Incorporation of international treaties into Indian law: While every country is bound to fulfil its international obligations and there are global ramifications in case of a failure to do so, the internal implementation of such treaties is dependent on whether the country adopts a monist or dualist approach.
In the former, as soon as a state has acceded to an international treaty, the treaty becomes part of the national law, i.e. the treaty is self-executing in nature. In the latter, a statute needs to be enacted for an international treaty to become part of the national law. India follows a dualist approach and for any treaty to be made binding domestically, Parliament needs to legislate under Article 253 of the Constitution (even though, on occasions, treaties have been read into domestic law by reading their content into fundamental rights).
As of today, there exists no law in furtherance of implementing India’s BITs. This may pose some difficulties considering the nature of India’s federal structure. India has a quasi-federal structure with a division of powers between the Centre and the states. The 7th Schedule of the Constitution consists of three lists—the Union list, the state list and the concurrent list. Insofar as the state list is concerned, it is only the state legislature that is competent to enact laws.
The executive power of the Centre is coextensive with that of its legislative powers (Article 73) and includes rights, powers and jurisdiction exercisable pursuant to any treaty/agreement. In other words, in relation to an item falling within the state list, the Central executive will not have the ability to exercise any powers unless such power is expressly in furtherance of a statute framed under Article 253—in furtherance of an international treaty.
Suggested next steps: Consequently, the need of the hour is for Parliament to legislate and recognise the validity of BIT awards, and to provide to the Central executive the power to override state legislation that may be impugned in a BIT arbitration. In the absence of the same, the Government of India will never be in a position to implement any BIT awards against state legislation without enacting individual legislation in relation to each award, which will be a cumbersome process.
However, such power without any state participation in the process could erode our existing quasi-federal structure; hence it is important that states are made stakeholders at the time of negotiating and signing BITs as well as in contesting arbitrations involving a particular state. Both the National Commission to Review the Working of the Constitution as well the Commission on Centre-State Relations (“Commission”) have pointed out the need for a comprehensive consultation process between the Centre and the states before signing and implementing treaties that directly impinge on subjects in the state list.
The Commission has gone as far as to suggest that “there may be treaties or agreements which, when implemented, put obligations on particular states affecting its financial and administrative capacities. In such situations, in principle, the Centre should underwrite the additional liability of concerned states according to an agreed formula between the Centre and states”.
The Commission has also set out in detail the need for democratising the treaty-making process by providing for Parliamentary control prior to executing any treaty. In the absence of such a process, executing a treaty is left to the whims and fancies of the executive since, though theoretically possible, the Parliament would find it “embarrassing” internationally to rescind a treaty already executed.
While no institutional mechanism has been arrived at, former finance minister Arun Jaitley proposed in the Union Budget for 2016-2017 that an agreement be signed between the Union and the states, i.e. the Centre-State Investment Agreement (CSIA), to facilitate smooth implementation of the BITs entered into by India. If implemented, the CSIA—currently in its preliminary stages—will be the first move to actually involve the states in an area that has exclusively been within the Union’s realm so far.
It is time to act on these recommendations and move towards enacting a comprehensive statute for signing and implementing BITs without eroding our existing quasi-federal structure. There are other constitutional conundrums, such as the concept of “judicial appropriation” and its potential conflict with the basic structure of the Indian Constitution. These will be analysed in subsequent articles.
(Anirudh is co-author of ‘The Law of Reservation and Anti-discrimination’ and is chief editor of ‘Justice R S Bachawat’s Law of Arbitration and Conciliation’)
Anirudh Krishnan
Advocate at the Madras High Court (anirudh@aklawchambers.com)