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The suspension of most favoured nation (MFN) status for India by Switzerland introduces tax challenges for Indian firms operating in Switzerland, particularly in sectors like financial services, pharmaceuticals, and IT.
Investors need to keep an eye on sectors like pharmaceuticals, IT, financial services, and engineering goods.
Switzerland’s recent decision to suspend the Most Favoured Nation (MFN) status for India could impact Indian investors in IT, pharma and financial services. This move disrupts the preferential trade framework that India previously enjoyed under the World Trade Organization’s (WTO) MFN principle. Here’s everything investors need to know.
What Is The Issue?
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.
The companies 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.
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.
What Is MFN Status?
The MFN status is a cornerstone of global trade under WTO rules. It mandates that countries treat all trading partners equally, ensuring the same trade tariffs, quotas, and regulations applied to the most favoured partner. The suspension of this status by Switzerland means Indian goods and services may now face higher tariffs, additional trade barriers, and reduced access to the Swiss market.
How Will It Impact Investors?
GTRI founder Ajay Srivastava said the suspension of the MFN clause is a setback for Indian firms operating in Switzerland.
This suspension introduces tax challenges for Indian firms operating in Switzerland, particularly in sectors like financial services, pharmaceuticals, and IT, according to the think-tank Global Trade Research Initiative (GTRI).
According to a stock market analyst, “Investors need to keep an eye on sectors like pharmaceuticals, IT, financial services, and engineering goods.”
What Does Indian Govt Say?
India has said its double taxation treaty with Switzerland may require renegotiation in view of its trade pact with the member states of the European Free Trade Association (EFTA).
“My understanding is that with Switzerland, because of EFTA, the double taxation treaty that we have; it’s going to be renegotiated. That is one aspect of it,” MEA spokesperson Randhir Jaiswal said while responding to a question on the issue at his weekly media briefing.
India-Switzerland Trade Partnership
In FY 2023-24, bilateral trade between India and Switzerland was about $23.76 billion, with the majority of this being imports at nearly $21.24 billion from Switzerland.
Switzerland imports gold and silver, primarily used in the jewellery sector, pharmaceutical intermediates and machinery. Major exports include pharmaceutical products, gems and jewelry, organic chemicals, and machinery.
India received about $10.72 billion in foreign direct investments from Switzerland between April 2000 and September 2024.
In March this year, India signed a free trade agreement with the four European nation bloc EFTA, whose members are Iceland, Liechtenstein, Norway, and Switzerland. Switzerland is the largest trading partner of India, followed by Norway, in the bloc.
The India-Switzerland Double Taxation Avoidance Agreement was signed on November 2, 1994, and subsequently amended in 2000 and 2010.