REAL REASON: Why Swiss Govt revoked India's MOST FAVOURED NATION status!
Switzerland's decision to revoke the MFN status was not a sign of deteriorating bilateral relations.
Recently, I wrote an explainer on how India’s latest free trade deal with Switzerland is the first of its kind 🙏🙏
But, in the comments, a good lot of people called out the weeks-old move of the Swiss Govt to revoke the MOST FAVOURED NATION (MFN) tag accorded to India.
That made me realise, most of the people don’t have a clue on what MFN status means, what triggered its revocation, and what the implications are.
Thus, here is a layman’s explainer of the TRUTH!
See, Switzerland's decision to revoke the MFN status was not a sign of deteriorating bilateral relations.
This action was necessitated by a Supreme Court ruling concerning Nestle, which ended up causing trouble for all the Swiss companies operating in India and sending back any dividends 🙏🙏
-> Switzerland and India had an agreement that was supposed to make taxes on things like dividends easier between the two countries
-> This agreement included an MFN clause, which meant that if Switzerland gave better tax deals to any other country, India would automatically get those same benefits. And vice versa also applied
And as India had extended better tax deals to a few other countries (Lithuania, Columbia), Nestle demanded that Switzerland being a MFN party to India, should also be allowed to pay the lower tax rate.
And this was upheld by the Delhi High Court.
However, the Supreme Court overturned the ruling on a technicality! 📛📛
It said, that for India to give those better tax deals to Switzerland, India needed to officially say so in writing under Section 90 of the Income Tax Act!
-> Because of this, all Swiss companies lost what was supposed to be their right under the MFN status in India
-> And if Swiss companies in India are not getting the benefits under MFN clause, then there is no reason for Switzerland to offer the same to Indian companies operating in Switzerland
This is why, from 1 January 2025, if an Indian company gets money from its business in Switzerland (like dividends), they'll have to pay a higher tax on that money - 10% instead of the previous 5%.
And mostly, this will hit Indian IT and pharma players operating there. Like Dr Reddy’s.
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It was the Indian Govt, which did not implement its signed tax treaty with the Swiss Govt in a foolproof manner.
However, in the age of social media, where information is often reduced to bite-sized summaries, this complexity gets lost.
Take, for example, Rishi Bagree's viral tweet which tried to brew a narrative that pits nations against each other without delving into the policy and legal intricacies - All to get some engagement 📛📛
Best,
Jayant Mundhra