Switzerland’s recent decision to suspend the Most Favoured Nation (MFN) status for India under their Double Taxation Avoidance Agreement (DTAA) has triggered discussions about its implications on taxation and trade. While this move impacts taxation policies, it does not affect trade agreements, including India’s Trade and Economic Partnership Agreement (TEPA) with the European Free Trade Association (EFTA), of which Switzerland is a part.

What is Most Favoured Nation (MFN)?

The Most Favoured Nation (MFN) principle is a concept under the World Trade Organization (WTO) framework. When a country grants MFN status to another, it guarantees equal treatment in terms of tariffs, trade barriers, and other commercial advantages. Essentially, this means no discrimination—if a country gives favorable treatment to one trading partner, it must extend the same to all other MFN countries.

However, in this case, MFN is linked to taxation policies under DTAA, not trade.

Understanding DTAA (Double Taxation Avoidance Agreement)

A Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty signed between two countries to ensure that individuals or businesses operating in both countries are not taxed twice on the same income. For instance:

• If an Indian company earns income in Switzerland, DTAA ensures that taxes paid in Switzerland are either credited or exempted in India to avoid double taxation.

The MFN clause in a DTAA ensures that tax benefits offered to one country are also extended to all other nations with whom the MFN clause exists. Switzerland’s move to suspend MFN for India implies that certain tax benefits may no longer apply equally to Indian businesses or individuals operating in Switzerland.

The Current Issue

Switzerland announced that it will suspend MFN treatment for India under the DTAA starting January 1, 2025. However, this:

1. Only impacts taxation: Indian entities in Switzerland may face higher taxes or fewer benefits compared to other nations.
2. Does not affect trade agreements: India’s broader economic ties, especially under the TEPA, remain unaffected.

What is TEPA and EFTA?

The Trade and Economic Partnership Agreement (TEPA) is a free trade agreement signed between India and the European Free Trade Association (EFTA), a bloc comprising:

• Switzerland, Iceland, Norway, and Liechtenstein.

Under the TEPA:

• EFTA nations have committed to $100 billion in investments in India over 15 years.
• This agreement aims to create one million jobs in India and boost economic cooperation.

India’s Commerce Secretary, Sunil Barthwal, clarified that the suspension of MFN status under DTAA will not impact these investment commitments.

Why Did Switzerland Suspend MFN for India?

While Switzerland has not provided detailed reasons, such actions are usually due to:

1. Policy changes in taxation to favor certain countries.
2. Bilateral disagreements or an attempt to renegotiate DTAA terms to update them.

India’s Ministry of External Affairs has indicated that discussions to renegotiate the DTAA with Switzerland and the EFTA nations may take place soon.

Impact on India-Switzerland Relations

1. Trade and Investment

The suspension of MFN under DTAA does not affect trade or the TEPA agreement. India and Switzerland will continue their economic partnership, including the $100 billion investment plans.

2. Taxation

Indian businesses and individuals in Switzerland may face higher taxes due to the suspension. Without the MFN clause, Switzerland can choose not to extend favorable tax treatment to India that it may offer to other nations.

3. Renegotiation of DTAA

India is likely to renegotiate the DTAA to restore favorable tax terms and ensure parity in treatment. This will help protect Indian businesses and individuals from undue tax burdens.

What Lies Ahead?

India’s response will likely involve:

1. Renegotiating the DTAA to ensure fair taxation.
2. Continuing to strengthen trade and investment ties under TEPA, which remains unaffected.

Switzerland’s move highlights the complexity of bilateral taxation agreements and the role of MFN clauses. For India, protecting its businesses abroad while fostering economic partnerships will remain a priority.

Switzerland’s decision to suspend MFN status under the DTAA affects taxation but not trade or economic commitments under the TEPA agreement. India is expected to address this issue through renegotiation while ensuring that its broader economic relations with Switzerland and EFTA remain strong.