Faster To Arbitration, Still Shut Out On Tax: What India's New Investment Treaties Mean For Foreign Investors

In December 2020, an arbitral tribunal ordered India to pay Cairn Energy about USD 1.2 billion, plus interest and costs, for a tax demand raised under a retrospective amendment. Three months earlier, Vodafone had won a similar case. Both claims succeeded because the investment treaties under which they were brought did not exclude tax. Under the treaties India signs today, neither claim could have been brought at all.

That is the central point for any foreign investor reading the reports of India's new treaty framework. India is making it faster to reach international arbitration by shortening the period for which investors must first pursue remedies in Indian courts. However, it continues to keep taxation entirely outside the scope of treaty protection. Hence, the risk that sank Cairn and Vodafone, a dispute over tax on an exit, is precisely the risk that the new treaties will not cover. After the Supreme Court's judgment in the Tiger Global case in January 2026, that risk deserves particular attention.

This article traces how India's treaty policy has evolved since the Cairn and Vodafone disputes, explains what the new framework changes and what it leaves untouched, and considers what Tiger Global means for investors assessing tax exposure, treaty eligibility and their remedies if an exit is challenged. It is written for foreign investors, fund managers, in-house counsel and their advisers structuring investments into India.

How We Got Here: Vodafone, Cairn and the Retrospective Tax Disputes

Both disputes grew out of the same question, i.e., whether India could tax gains made by foreign companies on transfers of shares held outside India, where the underlying value lay in Indian assets.

In 2007, Vodafone acquired Hutchison's Indian telecom business by buying the shares of a Cayman Islands company. The Supreme Court held in 2012 that the transaction was not taxable in India. Parliament responded through the Finance Act, 2012, which inserted explanations into Section 9(1)(i) of the Income-tax Act, 1961 to tax indirect transfers of Indian assets, and gave them retrospective effect. Cairn faced a similar demand arising from an internal reorganisation carried out years earlier, before the listing of its Indian business, and the tax authorities raised an assessment of about ₹10,247 crore against Cairn UK Holdings.

Both companies turned to investment treaty arbitration, Vodafone under the India–Netherlands treaty and Cairn under the India–UK treaty. Both tribunals found that India had breached its obligation to accord fair and equitable treatment, with Vodafone's award delivered in September 2020 and Cairn's on 21 December 2020. Cairn then began proceedings to enforce its award against Indian state assets abroad.

India's eventual response came through the Taxation Laws (Amendment) Act, 2021, which withdrew the retrospective demands for indirect transfers made before 28 May 2012 and provided for refunds of amounts collected, without interest, on condition that the investor withdrew its claims. Cairn received a refund of about ₹7,900 crore and ended its proceedings. The indirect transfer provisions themselves, however, remained in force for later transactions.

The Treaty Reset: Taxation Excluded and a Five-Year Wait

The disputes also changed India's approach to investment treaties. Following a series of adverse awards, India terminated most of its older bilateral investment treaties in 2016 and 2017 and adopted a far more restrictive Model Bilateral Investment Treaty (“BIT”). Three features of that model matter most for present purposes:

1. Taxation is excluded - The treaty does not apply to any law or measure regarding taxation, so a tax dispute of the Cairn or Vodafone kind cannot be brought under it at all.
2. Five years in Indian courts first - An investor must pursue domestic remedies for five years before it can commence international arbitration.
3. Narrower protection - The model replaced the broad fair and equitable treatment standard with a narrower list of protections and omitted a most-favoured-nation clause, which investors had previously used to import better terms from other treaties.

Investors regarded the five-year requirement in particular as making treaty protection close to illusory, since few commercial disputes can wait that long for an effective remedy.

What the New Framework Changes

India's more recent treaties, and the revised model now under consideration, have begun to address the waiting period, while keeping taxation outside.

The Ministry of Finance confirmed in February 2026 that the revised model was being prepared, and in October 2026 it was reported to have been sent for Cabinet approval. Its final text has not been published, so the reported features should be verified once it is released. Even so, the direction is clear. Access to arbitration is becoming faster, but the subject matter that matters most to many exiting investors remains outside it.

For an investor, this creates a gap which is easy to overlook. A treaty with a short waiting period may protect a manufacturing plant against expropriation or discriminatory regulation, but it will not help a fund whose exit gains are taxed in a way it did not anticipate. That exposure must be managed through domestic tax law, India's tax treaties and the transaction documents, which is why Tiger Global is so significant.

The Tiger Global Judgment: Tax Residency Certificates Are No Longer Enough

In 2018, three Mauritius entities in the Tiger Global group sold shares in Flipkart, a Singapore company whose value lay largely in India, as part of Walmart's acquisition. They claimed that the gains, of about ₹14,500 crore, were exempt from Indian tax under the India–Mauritius tax treaty. The Authority for Advance Rulings rejected their applications at the threshold, the Delhi High Court set that decision aside in August 2024, and on 15 January 2026 a Division Bench of the Supreme Court, comprising Justices J.B. Pardiwala and R. Mahadevan, reversed the High Court.

The Court's reasoning has several strands, and each matters for investors:

1. A tax residency certificate is not conclusive - Under Section 90 of the Income-tax Act, a certificate is a condition for claiming treaty benefits but does not by itself establish entitlement, and the authorities may examine whether the entity has genuine substance.
2. Indirect transfers fall outside the grandfathering protection - The Court held that the provisions of the India–Mauritius treaty protecting pre-2017 investments, and its residuary capital gains clause, apply only to direct transfers of shares in Indian companies, and not to the sale of shares in a foreign company deriving value from India.
3. The general anti-avoidance rule ("GAAR") could apply - The Court held that the rules then in force applied GAAR to arrangements producing tax benefits after 1 April 2017, irrespective of when the investment was made, and that even apart from GAAR, the courts' own substance-over-form principles were available.

Justice Pardiwala, in a concurring opinion, emphasised the importance of preserving India's right to tax income arising within its territory and the role of anti-abuse provisions in its tax treaties.

The Government's Response on Grandfathering

The judgment caused considerable concern among investors with legacy structures, and the Central Board of Direct Taxes responded shortly afterwards. Through Notifications 54 and 55 of 2026, it amended Rule 10U of the Income-tax Rules, 1962 and the corresponding Rule 128 of the Income-tax Rules, 2026, framed under the Income-tax Act, 2025 which came into force on 1 April 2026. The amendments expressly provide that GAAR does not apply to gains arising from the transfer of investments made before 1 April 2017.

The relief is significant but limited. It restores the intended grandfathering for older investments under GAAR, but it does not alter the Court's conclusions that a tax residency certificate is not conclusive, that indirect transfers fall outside the treaty's grandfathering clause, and that the authorities may examine commercial substance. Investments made on or after 1 April 2017 receive no protection from the amendment at all.

What This Means for Foreign Investors

Taken together, these developments point to a clear allocation of risk. Investment treaties will increasingly protect against non-tax measures, and will do so more quickly than before. Tax risk, including the risk that an exit is taxed in a way the investor did not anticipate, sits almost entirely with domestic law and the investor's own structuring.

For investors structuring new investments, this has three practical consequences:

1. Substance matters more than the certificate - Holding entities in treaty jurisdictions should have real decision-making, management and commercial purpose in that jurisdiction, documented from the outset, rather than relying on a tax residency certificate alone.
2. Indirect structures carry indirect transfer exposure - Where an investment is held through an offshore company whose value derives substantially from India, investors should assume that the indirect transfer provisions may apply and that treaty relief may not be available.
3. Treaty eligibility should be tested, not assumed - The applicable tax treaty, its limitation of benefits provisions and the investor's ability to satisfy them should be assessed at entry, not at exit.

Remedies if an Exit Is Challenged

If the tax authorities challenge an exit, the investor's main remedies will lie in domestic law and in the tax treaty, not in an investment treaty. These include the appellate process under the Income-tax Act, writ proceedings before the High Courts in appropriate cases, advance rulings where a transaction is still being planned, and the mutual agreement procedure under the relevant tax treaty, through which the tax authorities of the two countries may resolve a dispute between themselves.

Contractual protections in the transaction documents are equally important. Buyers paying a non-resident seller may be required to withhold tax, as happened in Tiger Global, where about ₹967 crore was withheld at source. Sale agreements should therefore address withholding, tax indemnities, escrow or holdback arrangements and, where available, insurance for identified tax risks, so that the commercial consequences of an adverse ruling are allocated in advance rather than litigated afterwards.

An investment treaty may still be relevant at the margins, for example where a measure affecting the investment is not, in substance, a tax measure. However, investors should not plan on that basis, given how broadly the taxation exclusion is drafted.

Practical Takeaways

1. Read the treaty in force for your jurisdiction. Waiting periods and protections now differ significantly from one treaty to another, and several older treaties have been terminated.
2. Do not rely on an investment treaty for tax protection. Recent and proposed treaties exclude taxation, and the Cairn and Vodafone route is unlikely to be available for new investments.
3. Build and document substance in holding jurisdictions. After Tiger Global, a tax residency certificate is a starting point, not an answer.
4. Separate pre-2017 and post-2017 investments. The 2026 amendments protect gains from pre-1 April 2017 investments against GAAR, but later investments remain fully exposed.
5. Allocate exit tax risk in the deal documents. Withholding, indemnities, escrows and insurance should be negotiated before signing, not after an assessment is raised.

Conclusion

India's new investment treaties are a genuine improvement for foreign investors in one respect. They make international arbitration available sooner, and the reported two-year waiting period would be a considerable advance on the five years required under the 2016 model. However, they offer no protection on the question that gave rise to India's most prominent treaty disputes, i.e., the taxation of an investor's gains. Following Tiger Global, that question will be decided by the Income-tax Act, India's tax treaties and the courts, with the treaty's limitation of benefits and anti-avoidance rules applied to the investor's actual substance. Thus, for investors entering India today, faster access to arbitration should be welcomed, but the real protection for an exit will come from how carefully the investment is structured and documented at the outset.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.