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The recent withdrawal of India's Most Favoured Nation (MFN) status by Switzerland under their Double Taxation Avoidance Agreement (DTAA), effective January 2025, has significant implications for Indian businesses operating in Switzerland. This decision, stemming from a 2023 Indian Supreme Court ruling clarifying the application of MFN benefits, introduces a new layer of complexity to the bilateral economic relationship. The Supreme Court's ruling highlighted the importance of proper notification by Indian authorities for MFN benefits to be triggered, a procedural aspect that seemingly hasn't been consistently adhered to. This leaves Indian companies vulnerable to higher tax burdens and necessitates a proactive approach to navigating this altered landscape. The immediate impact will primarily be felt by those companies with considerable operations and investments in Switzerland. This predominantly includes businesses in the industrial, technological, and financial sectors; sectors which often have substantial cross-border collaborations and capital flow.
The most direct consequence of the MFN status withdrawal is an increase in the dividend withholding tax for Indian entities in Switzerland. This tax will rise to 10%, a considerable jump from the previously enjoyed lower rate under the MFN clause. This increase in tax liability will directly affect profitability and competitiveness for Indian businesses operating in or investing in the Swiss market. The increased tax burden could potentially lead to reduced investment flows from India to Switzerland, impacting not only individual companies but also the overall bilateral economic partnership. Further, it could necessitate a strategic reassessment of investment strategies for these companies, potentially leading to a shift in investment focus towards jurisdictions offering more favorable tax regimes. This will have knock-on effects across various sectors, potentially impacting employment and market share in India and potentially reducing competitiveness against firms from other nations in the Swiss market.
The Indian Ministry of External Affairs (MEA) has rightly responded by signaling the need for renegotiation of the India-Switzerland DTAA. This move reflects the urgency of addressing the implications of the withdrawn MFN status and securing a more favorable arrangement for Indian businesses. The MEA's suggestion of using the ongoing India-EFTA (European Free Trade Association) trade discussions as a platform for treaty renegotiation is a pragmatic approach. The EFTA, encompassing Switzerland, aims to bolster investments in India, targeting $100 billion over 15 years through a new free trade agreement. This ambitious target emphasizes the mutual economic benefits inherent in a strong bilateral partnership, creating a conducive environment for negotiation. The success of these negotiations will hinge on both countries' ability to find common ground. The dialogue must encompass not only tax implications but also broader aspects of trade and investment to ensure a comprehensive and mutually beneficial agreement that safeguards the interests of both sides and aligns with evolving global economic dynamics.
The India-Switzerland DTAA, originally signed in 1994 and subsequently revised, aimed to prevent double taxation and encourage seamless trade and investment. The MFN clause, a crucial component of this agreement, ensured equitable treatment for investors, granting them benefits or reduced tax rates comparable to those offered to other nations. The revocation of this clause introduces an element of uncertainty into the future of bilateral trade and investment. The renegotiation process will involve intricate legal and economic considerations, requiring meticulous preparation and skilled negotiation. The outcome will significantly influence the investment climate for Indian companies in Switzerland and vice versa. The situation also serves as a reminder of the dynamic nature of international agreements and the importance of adapting to global economic shifts. Businesses must not only be prepared for immediate financial adjustments but should also actively engage in understanding the long-term implications of these changes to adjust their operations accordingly.
Source: Switzerland withdraws India's 'most favoured nation' status: 2 key impacts