TL;DR: Switzerland has revoked India's 'Most Favoured Nation' (MFN) status after an Indian Supreme Court ruling against Nestlé. Starting January 1, 2025, Indian companies will face a higher 10% tax on dividends from Swiss investments. This move could strain economic ties and is seen as a setback for the Modi government's foreign policy.
Switzerland's decision to suspend India's MFN status stems from a 2023 Indian Supreme Court verdict involving Nestlé. The court ruled that the MFN clause in tax treaties isn't automatically applicable without specific government notification. This interpretation led Switzerland to reassess its tax agreement with India.
What's the MFN Clause? It's a provision in tax treaties ensuring that if a country offers a lower tax rate to another nation, the same benefit extends to existing treaty partners. In this case, the clause would have allowed Indian entities to enjoy reduced tax rates on dividends from Swiss investments.
Impact on Indian Companies:
Higher Taxes: From January 1, 2025, dividends earned by Indian entities from Swiss sources will be taxed at 10%, up from the previous 5%.
Increased Costs: The higher tax rate could lead to increased operational costs for Indian businesses with investments in Switzerland.
Investment Decisions: The tax hike might deter Indian companies from investing in Switzerland, potentially affecting bilateral trade relations.
MediaFx's Take: This development highlights a diplomatic shortcoming of the Modi government. Effective diplomacy is crucial to safeguard national economic interests. The government must proactively engage in international negotiations to prevent such setbacks.
