New Delhi, December 13: The suspension of the MFN (most favoured nation) clause by Switzerland underscores the need for India to adopt a more consistent and strategic approach to international taxation treaties, think tank GTRI said on Friday. This suspension introduces tax challenges for Indian firms operating in Switzerland, particularly in sectors like financial services, pharmaceuticals, and IT, it said.

They will now have to pay a 10 per cent tax on dividends and other incomes, up from the earlier 5 per cent, effective January 1, 2025. It said that proactive negotiations to clarify and harmonise interpretations of treaty provisions are essential to safeguard Indian firms' interests abroad. India’s MFN Status in Switzerland Revoked.

Additionally, India must ensure that its treaty frameworks reflect contemporary business realities, particularly in the digital and service sectors, to reduce tax uncertainties and promote global competitiveness, the Global Trade Research Initiative (GTRI) said. The Swiss government has suspended the most favoured nation status (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland, potentially impacting Swiss investments in India and leading to higher taxes on Indian companies operating in the European nation.

According to a December 11 statement by the Swiss finance department, the move follows the Supreme Court of India last year ruling that the MFN clause doesn't automatically trigger when a country joins the OECD if the Indian government signed a tax treaty with that country before it joined the organisation. GTRI founder Ajay Srivastava said the suspension of the MFN clause is a setback for Indian firms operating in Switzerland. TCS Partners With Switzerland-Based Energy Management Solution Company Landis+Gyr To Achieve Sustainability Goals, Reduce Carbon Emissions.

Previously, Indian companies benefited from a reduced tax rate of 5 per cent on dividends and other incomes, thanks to Switzerland's earlier application of MFN benefits. With the reversion to a 10 per cent residual rate starting January 1, 2025, these firms face higher tax liabilities, reducing their competitiveness compared to businesses from countries still benefiting from MFN provisions, he said.

The Supreme Court judgment sets a precedent that could influence how India handles similar clauses in agreements with other trading partners, he said, adding that if disputes over MFN interpretations persist, Indian businesses could face similar challenges in other jurisdictions, potentially deterring outbound investments. "The suspension of the MFN clause by Switzerland and earlier issues with Australia underscore the need for India to adopt a more consistent and strategic approach to international taxation treaties," Srivastava said.

The DTAA are subject to different interpretations many times due to imprecise language. For example, Indian software firms faced disputes over the classification of income under the India-Australia DTAA. He explained that Australia often categorises payments for software licenses and services as royalties, making them subject to source taxation.

Indian firms argue that such payments should be treated as business income, taxable only in India unless they maintain a permanent establishment (PE) in Australia. "This mismatch in interpretations leads to potential double taxation and compliance challenges, compounded by Australia's reliance on domestic laws that may override treaty provisions," Srivastava said.

The India-Switzerland Double Taxation Avoidance Agreement was signed on November 2, 1994, and subsequently amended in 2000 and 2010. The agreement aimed to facilitate smoother cross-border trade and investment by mitigating the risks of double taxation. The MFN clause, a critical component of the treaty, ensures that countries treat partner nations' investors no less favourably than investors from any third country.

For instance, if Switzerland offered reduced tax rates or additional benefits to another country, these benefits were expected to extend to Indian firms under the MFN clause. India signed a free trade agreement in March with the four European nation bloc EFTA. The European Free Trade Association (EFTA) members are Iceland, Liechtenstein, Norway, and Switzerland. Switzerland is the largest trading partner of India followed by Norway in the bloc.

In 2023-24, India's imports from Switzerland stood at USD 21.24 billion, in stark contrast to its exports of USD 1.52 billion, leading to a substantial trade deficit of USD 19.72 billion. India received about USD 10.72 billion in foreign direct investments from Switzerland between April 2000 and September 2024.

(This is an unedited and auto-generated story from Syndicated News feed, LatestLY Staff may not have modified or edited the content body)