Switzerland Suspends MFN Clause in DTAA: What It Means for India
In a move that could disrupt Swiss investments in India, Switzerland has suspended the Most-Favoured-Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) between the two countries. This decision follows a 2023 Supreme Court ruling in India, which determined that the MFN clause is unenforceable unless officially notified under the Income-Tax Act.
As a result, Swiss businesses, including Nestlé, will face higher tax rates on dividends and royalties generated in India, beginning January 1, 2025. The suspension of the MFN clause marks a significant change in the tax treatment of foreign businesses in India and has potential ramifications for Swiss-Indian economic relations.
Supreme Court Ruling Triggers Tax Policy Change
The Indian Supreme Court’s ruling in 2023 led to the suspension of the MFN clause. The court found that the provisions of the DTAA cannot be enforced unless formally notified under the Income-Tax Act. This ruling overturned a Delhi High Court decision that had protected foreign companies from double taxation, ensuring that they were not taxed at both ends of the trade deal.
The suspension of the MFN clause, following this legal shift, now means that Swiss businesses will face a higher tax burden, particularly in the form of increased taxes on dividends from their Indian operations.
Impact on Swiss Companies like Nestlé
The suspension of the MFN clause will significantly affect Swiss multinational corporations operating in India, particularly consumer goods giant Nestlé. The higher taxes on dividends will impact the profitability of these companies, potentially making India a less attractive investment destination.
Swiss companies with large operations in India may now reconsider their future expansion plans in the country or even look to other markets with more favorable tax treatment. This change in tax policy could prompt companies like Nestlé to rethink their long-term business strategies in India.
The $100 Billion Investment Deal Under Threat
One of the most significant aspects of this development is the potential impact on the $100 billion investment deal signed in 2024 between India and the European Free Trade Association (EFTA). Swiss companies are key participants in this deal, which promises to inject significant capital into the Indian economy over the next 15 years.
However, the new tax regime could deter Swiss companies from committing to the full extent of the investment. The suspension of the MFN clause raises concerns about the financial viability of the deal, potentially leading to delays or reductions in the agreed-upon investment amounts.
How India and Switzerland Can Resolve the Issue
To protect their economic ties, India and Switzerland will need to engage in diplomatic negotiations to address the tax concerns. Switzerland may need to reconsider its tax policy to prevent further disruption of business operations and investment flows to India.
India, for its part, will need to reassure Swiss investors that the country remains a favorable destination for foreign capital. Both countries have a vested interest in resolving this issue quickly to ensure that the bilateral trade relationship remains strong and stable.
The suspension of the MFN clause by Switzerland presents a significant challenge to Swiss companies operating in India and could have serious consequences for the $100 billion investment agreement. Both India and Switzerland must act swiftly to address the issue and preserve their valuable economic relationship.
Saathee Global
