 "Explainer: What is Most Favored Nation, Know Why Switzerland took this status back from India")
Switzerland has terminated India’s current Most-Favoured Nation (MFN) status. Switzerland has taken this step after the decision of the Supreme Court of India. The judgment held that the Double Taxation Avoidance Agreement (DTAA) will not come into force until it is notified under the Income Tax Act. This decision will have a direct impact on other Swiss companies like Nestlé, who will now have to pay higher taxes on dividends. Now the Indian companies will also have to face a higher tax deduction on the income generated in Switzerland. This decision will be effective from January 1, 2025. This is also likely to have an impact on Swiss investment in India.
What is most-favored-nation, let’s know?
Most Favored Nation or MFN is a special status. According to Article 1 of the General Agreement on Tariffs and Trade (GATT), 1994, each WTO (World Trade Organization) member country must grant MFN status (or preferential trade terms with respect to tariffs and trade barriers) to all other members. is needed Country is important. It assured the MFN nation that trade would be conducted without any discrimination. According to WTO rules, two such countries cannot discriminate against each other in any way. It also states that if a trading partner is given special status then all WTO member countries should also be given the same status.
164 countries are members of WTO
WTO is the only global international organization that deals with the regulation of trade between countries. WTO Its 164 member countries represent 98 percent of world trade. Only a handful of very small countries are outside the WTO. WTO Its main objective is to open up trade for the benefit of all. In this sense, the term ‘most-favored’ seems like a contradiction in terms. But even though it suggests special treatment, the WTO In this it basically means non-discrimination, meaning treating everyone roughly equally. In effect each WTO member is considered ‘most-favored’ to all other WTO members.
Benefits of obtaining MFN status
Most Favored Nation status only means that any country that has this status will not be at a disadvantage in trade with any other country. When a country is given this status, it is expected to reduce tariffs. Apart from this, many goods are imported and exported between the two countries without any duty. A country that is given Most Favored Nation status is given more preference in trade. MFN is a beneficial deal for developing countries. This gives these countries a large market. With which they can easily transport their goods to the global market.
Can MFN status be withdrawn?
Under Article 21B of the WTO, any country can withdraw most-favored-nation status from another country if a dispute arises between the two countries over security-related issues. However, several conditions have to be fulfilled for this. But the case between India and Switzerland is different. According to the Swiss government’s statement, in the Nestlé case, the Delhi High Court had upheld compliance with the residual tax rate in 2021 considering the most-favored status in the Double Tax Avoidance Agreement (DTAA). But the Supreme Court overturned this order in a judgment dated 19 October 2023. Nestle, a packaged food business, is headquartered in Vevey, Switzerland. The Swiss Finance Department in its statement has announced the suspension of MFN status under the agreement between the two countries to avoid double taxation on income.