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.
Not only did the government not make any effort to issue a notification extending MFN benefits to Switzerland, it had vehemently argued before the SC against automatic applicability of the MFN clause.
Never mind that the same government has negotiated the inclusion of an MFN clause in several tax agreements, and that notifications under Section 90 of the IT Act are typically made to enforce entire agreements and not their specific provisions.
By arguing for specific notifications for specific provisions under tax treaties, the government opened a Pandora’s Box.
While India may hope to benefit from MFN or similar provisions in its bilateral treaties, which could be contingent upon some conditions being fulfilled, bureaucratic protocols such as IT Act notification—in addition to hard fought conditions under these agreements— can create unnecessary complications and delay the process of claiming treaty benefits.
The confusion could have been cleared by a clarificatory amendment to Section 90.
Such inconsistent positions and opportunistic interpretations do not go unnoticed internationally. They create uncertainty among countries that have or are exploring treaties with India and prompt companies to revisit their investment plans and partnership discussions, thereby compromising India’s economic interests.
Sadly, this is not end of the story. Under the Indo-Swiss DTAA, if other OECD countries receive better tax treatment than Switzerland in relation to withholding tax, it would also become eligible to receive such benefits from India.
It pointed out that since Lithuania and Colombia were getting better treatment, when they were inducted into the OECD, it should also get similar treatment.
Curiously, in the Nestle matter, the Indian government argued in the SC that since the other two countries were not part of the OECD at the time of their agreement with India, similar treatment couldn’t be provided to Switzerland, which has been in the OECD for long.
Going by the dates of countries’ membership of groupings to extend treaty benefits could be a self-goal for India. First, suppose India was offering preferential treatment to a country which was an OECD member (or other grouping) but hypothetically opts out later, would India continue to accord it (and other members) MFN treatment?
Second, India is part of several regional groupings whose membership continues to evolve. Would it want to lose out on MFN benefits just because a recently inducted country signed a more beneficial treaty before its induction in the grouping?
Third, Indian treaty negotiators presumably worked hard to incorporate MFN provisions. The idea is to attract foreign investments and obtain reciprocal benefits for Indian investors abroad. Would they have envisaged losing these benefits on a mere date technicality? Seems unlikely.
While the Indian government’s practice of taking contradictory positions on an issue has regrettably become a norm, the judiciary’s acceptance of such arguments is much more worrisome. Over the years, the judiciary has followed the principles of consistent interpretation of domestic and international laws, while acknowledging their evolving nature.
Without an explicit preference for domestic laws, both are expected to be interpreted consistently. Disregarding such well settled principles, the judiciary in the Nestle matter upheld an interpretation that favoured revenue over both the economy’s interest and international norms, thereby overturning years of jurisprudence.
The Nestle decision and subsequent (in)actions indicate a collective failure of the Indian state. Inconsistent interpretations and the lack of efforts by the legislature, executive and judiciary to take corrective action signal the tacit approval of top decision makers.
Such episodes can hurt India’s economic interests and create roadblocks in pursuit of Viksit Bharat. Government alertness on such issues is important.
The authors are, respectively, vice president of Pune International Centre and secretary general of CUTS International.
Amol Kulkarni of CUTS contributed to this article.
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