Switzerland has suspended the Most-Favoured-Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) with India, which could potentially impact Swiss investments in India and result in higher taxes for Indian companies operating in Switzerland. This decision was made in response to a ruling by the Indian Supreme Court last year, which stated that the DTAA cannot be enforced unless it is notified under the Income-Tax Act. As a result, Swiss companies such as Nestlé face higher taxes on dividends, which could discourage future investments in India.
The Supreme Court ruling overturned a Delhi High Court order that had ensured companies and individuals were not subject to double taxation while working in or for foreign entities. This has caused concern among tax experts, who believe that the move by Switzerland could have a negative impact on investments in India. The suspension of the MFN clause means that dividends will be subject to a higher withholding tax, making it less attractive for Swiss companies to invest in India.
This decision also poses a risk to the $100 billion investment commitment made by the four-nation European Free Trade Association (EFTA) in India over a 15-year period. The EFTA, which includes Switzerland, signed a trade pact with India in March this year. The suspension of the MFN clause could potentially discourage other countries from investing in India as well.
The Swiss government has stated that the suspension was enforced due to a lack of reciprocity in the DTAA by the Indian government. They have also announced that for dividends due on or after January 1, 2025, the residual tax rate in the source state will be limited to 10 per cent. This means that income accruing on or after this date may be taxed in the source state at the rates provided in the DTAA, regardless of the MFN clause.
Tax experts believe that this decision by Switzerland is a direct response to the Nestlé ruling by the Indian apex court in 2023. The court held that the MFN application is not automatic and requires a separate notification from India to grant lower tax rates under the clause. Switzerland believes that it is not receiving the same treatment that India grants to other countries with more favourable tax treaties, and this goes against the principle of reciprocity.
In conclusion, the suspension of the MFN clause by Switzerland could have a significant impact on investments in India, particularly from Swiss companies. It remains to be seen how the Indian government will respond to this decision and whether it will have any implications for other countries with similar tax treaties.