Daily Current Affairs : 14-December-2024

Switzerland recently made a significant change to its tax policies by revoking India’s Most Favoured Nation (MFN) status in the Double Taxation Avoidance Agreement (DTAA). This decision follows a Supreme Court ruling in India related to an adverse tax case involving Nestle. The move will have an impact on Indian companies operating in Switzerland, particularly due to the new 10% withholding tax that will come into effect on January 1, 2025. This essay explains the concept of MFN, its importance, and the recent changes in India-Switzerland tax relations.

What is Most Favoured Nation (MFN)?

Definition and Principle:

  • MFN is a term used in international trade agreements, primarily governed by the World Trade Organization (WTO).
  • It ensures that countries treat each other equally by offering the same favorable trade conditions, such as low tariffs, minimal trade barriers, and high import quotas.

How MFN Works:

  • If one country offers better trade terms to another, it must offer those same terms to all other WTO member countries.
  • For example, if India gets a tax break in Switzerland, Switzerland must offer the same break to all WTO members.

Granting MFN Status:

  • MFN status is automatically granted to all 164 members of the WTO.
  • It aims to ensure fair and equal treatment in international trade relations.
Features of MFN
  • Fair Trade: It ensures equal and non-discriminatory treatment in trade policies.
  • Lowest Tariffs: Countries with MFN status enjoy the lowest tariffs on imports.
  • Minimal Trade Barriers: It leads to fewer restrictions and barriers in international trade.
The Impact of Removing MFN Status

Switzerland’s decision to revoke India’s MFN status will have immediate financial implications. Starting January 2025, Indian companies will be subject to a 10% withholding tax on their income in Switzerland. This means that Indian businesses operating in Switzerland will face higher tax rates than before, making their operations more expensive.

Why MFN Status Was Revoked

The revocation of MFN status comes after a ruling by the Indian Supreme Court, which was unfavorable to Nestle in a tax dispute. The decision marks a shift in the tax relationship between India and Switzerland, and it may signal changes in how tax agreements are structured between these two countries in the future.

Important Points:
  • MFN (Most Favoured Nation) is a principle under the World Trade Organization (WTO) ensuring equal trade treatment among member countries.
  • MFN Status guarantees countries the lowest tariffs, minimal trade barriers, and high import quotas.
  • WTO Grants MFN Automatically to all 164 member countries.
  • India’s MFN Status Revoked by Switzerland following an adverse Supreme Court ruling in a tax case involving Nestle.
  • Impact: Indian companies will face a 10% withholding tax on income in Switzerland starting January 1, 2025.
  • MFN Originated post-World War II as a cornerstone of the multilateral trading system.
  • No Formal WTO Procedure exists for removing MFN status, and countries are not obligated to notify the WTO when suspending MFN treatment.
  • The revocation of MFN could signal potential changes in future tax agreements between India and Switzerland.
  • Bilateral Trade Agreements and special access for developing nations are exceptions to MFN principles.
Why In News

Switzerland has recently revoked India’s Most Favoured Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA), following an adverse ruling by the Indian Supreme Court in a tax dispute involving Nestle, marking a significant shift in the tax relationship between the two countries. This change could have broader implications for future economic and trade agreements between India and Switzerland.

MCQs about Switzerland Revokes India’s MFN Status
  1. What does the Most Favoured Nation (MFN) status ensure in international trade?
    A. Countries with MFN status pay no taxes.
    B. Countries receive the same trade terms as the most favored country.
    C. Countries automatically become WTO members.
    D. Countries with MFN status can impose higher tariffs.
    Correct Answer: B. Countries receive the same trade terms as the most favored country.
    Explanation: MFN ensures that countries are treated equally in trade policies, offering them the same favorable trade terms (like tariffs and import quotas) as the most favored country within the WTO framework.
  2. What is the immediate impact of Switzerland revoking India’s MFN status?
    A. Indian companies will get a 10% tax rebate.
    B. Indian companies will face a 10% withholding tax on income in Switzerland.
    C. Indian companies can import goods at lower tariffs from Switzerland.
    D. Indian businesses will be exempt from any tax in Switzerland.
    Correct Answer: B. Indian companies will face a 10% withholding tax on income in Switzerland.
    Explanation: With the revocation of MFN status, Indian companies will be subjected to a 10% withholding tax on income earned in Switzerland, which will take effect from January 1, 2025.
  3. Which of the following is true about the MFN status in the context of the WTO?
    A. MFN status is granted only to developing countries.
    B. MFN status automatically applies to all 164 WTO members.
    C. MFN status is a temporary trade benefit granted every year.
    D. Countries can choose not to follow MFN rules without consequences.
    Correct Answer: B. MFN status automatically applies to all 164 WTO members.
    Explanation: MFN status is automatically granted to all 164 members of the WTO, ensuring equal trade treatment and non-discriminatory practices among member countries.
  4. Why did Switzerland revoke India’s MFN status in the DTAA?
    A. Due to a tax dispute involving Nestle and a ruling by the Indian Supreme Court.
    B. Because India did not agree to a new trade agreement with Switzerland.
    C. Because India violated WTO rules on tariffs.
    D. Because Switzerland was not a member of the WTO.
    Correct Answer: A. Due to a tax dispute involving Nestle and a ruling by the Indian Supreme Court.
    Explanation: Switzerland revoked India’s MFN status after an unfavorable ruling in a tax case involving Nestle, which led to changes in the tax agreement between the two countries.

Boost up your confidence by appearing our Weekly Current Affairs Multiple Choice Questions

Loading