Most favoured interpretations can prove unfavourable

India's stance on Switzerland's MFN status in a Nestle tax dispute has had adverse consequences

- VIJAY L. KELKAR & PRADEEP S. MEHTA

The new Reserve Bank of India governor, Sanjay Malhotra, in one of his last addresses as revenue secretary, quite rightly suggested that tax officials consider economy's interests before revenue's. If this golden rule is applied across the board, we will not have faced an embarrassment with the Swiss government over their withdrawal of our most favoured nation (MFN) status, because of our negligence.

In October 2023, the Indian Supreme Court (SC) had decided in the Nestle matter that MFN treatment under India's double tax avoidance agreements (DTAAs) cannot automatically extend to a country without an executive notification under Section 90 of the Income Tax (IT) Act. In December 2024, Switzerland decided to withdraw the MFN benefits it was unilaterally providing to Indian entities under an India-Switzerland DTAA, for lack of reciprocity.

For more than a year, the Indian government knew about the SC judgement but did not act, presumably because it didn't want to give up a chance to collect higher taxes from Swiss entities. Unfortunately, as it happens, bilateral treaties operate on trust and mutual benefit. A country cannot hope to continue receiving benefits under a treaty without offering similar treatment to its counterparties. The MFN withdrawal by Switzerland is likely to hit Indian companies operating in Switzerland, leaving them worse off against their competitors from other countries that continue to enjoy such benefits.