Switzerland’s decision to suspend the Most Favoured Nation (MFN) treatment for India under the two countries’ 30-year-old double-taxation avoidance agreement (DTAA) from January 1 shows that as far as India is concerned, the more things change, the more they remain the same. Despite the rapid changes in the external environment, the difference in understanding or interpretation of the country’s laws and rules by companies, tax administration, and judiciary has remained constant. The result is there for all to see: India’s reputation as an attractive investment destination has taken quite a few knocks because of its unpredictable, ever-changing tax rules and their interpretation. Though in a different context, the storm over Vodafone and Nokia tax dispute is still cited by many foreign investors as shining examples of India’s tax arbitrariness.
The Swiss government’s move follows the Supreme Court of India’s ruling last year that the MFN clause doesn’t automatically trigger when a country joins the Organisation for Economic Co-operation and Development (OECD) if the Indian government signed a tax treaty with that country before it joined the organisation. This view in a case involving dividend payment by Nestle India was at variance with Switzerland’s stand that the MFN clause apples automatically to countries that joined the OECD after 1994. As a demonstrative effect of its belief, Switzerland unilaterally reduced the tax rate on dividends for Indian firms from 10% to 5%, citing treaties India signed with Lithuania and Colombia, which became OECD members in 2018 and 2020 respectively. The Indian government, however, felt that the MFN clause applies only to countries that were OECD members in 1994, when the treaty was signed. India also argued that MFN benefits are not automatic and require explicit notification—a stand the SC agreed to.
The immediate implication of the move will be a higher tax burden on Indian firms operating in Switzerland, reducing their competitiveness compared to businesses from countries still benefiting from MFN provisions. If disputes over MFN interpretations persist, Indian businesses could face similar challenges in other jurisdictions as well. Both Switzerland and Indian government officials have, however, put up a brave face and said the DTTA dispute should have no impact on any other treaties under international law concluded between Switzerland (independently or under the European Free Trade Association (EFTA) framework and India. The agreement signed with the four-nation EFTA bloc is a unique free trade agreement, as it includes a binding commitment of $100 billion investment and the creation of one million direct jobs in India by companies from those four countries over the next 15 years. An external affairs ministry spokesman also said that the double taxation treaty with Switzerland may require renegotiation in view of its trade pact with the member states of the EFTA.
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One has to wait for the validity of these assertions, but the short point is India should avoid the kind of confusion that was visible in the case of the DTAA with Switzerland. In this context, the government would do well to listen to think tank Global Trade Research Initiative, which stressed the need for India to adopt a more consistent and strategic approach to international taxation treaties. Proactive negotiations to clarify and harmonise interpretations of treaty provisions are essential to safeguard Indian firms’ interests abroad. Additionally, India must ensure that its treaty frameworks reflect contemporary business realities, particularly in the digital and service sectors, to reduce tax uncertainties.