The Most Favoured Nation (MFN) provision ensures that if a country grants a benefit to another nation under a treaty, the same benefit must be extended to all other treaty-signing nations.
Suppose State A signs a treaty with State B, which includes the MFN provision. If State B later extends tax benefits to State C, those benefits should also apply to State A under the MFN clause.
Switzerland’s decision followed a Supreme Court of India ruling in the case of Assessing Officer v. Nestlé (October 2023). The court ruled that India’s DTAA with Switzerland did not obligate India to extend preferential tax rates provided to countries like Colombia and Lithuania, as they were not OECD members when the India-Switzerland DTAA was signed.
Nestlé claimed a reduced dividend tax rate of 5% (instead of 10%) under the MFN clause, citing India’s agreements with Colombia and Lithuania. The Supreme Court rejected this, stating that the MFN clause applied only to countries that were OECD members at the time of signing the treaty.
Indian companies operating in Switzerland now face a higher withholding tax rate of 10%, compared to the earlier 5%. This increases their tax burden significantly.
Switzerland’s move may reduce investments into India and affect companies’ profits. Other OECD countries like the Netherlands may also reconsider their MFN obligations with India.
India could lower the tax rate back to 5% by issuing a notification under Section 90(1) of the Income Tax Act. However, this would require offering similar benefits to other OECD countries and could lead to revenue loss.
This situation underscores the need for India to uphold non-discrimination for foreign companies within its jurisdiction to avoid reciprocal measures abroad, which could harm Indian businesses globally.
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