Why Swiss response to Nestle SC verdict may not be just a tax issue for India

Earlier this week, Switzerland unilaterally withdrew the ‘most favoured nation or MFN’ status it had accorded to India under the Double Taxation Avoidance Agreement (DTAA) the countries had signed in 1994.

The Swiss authorities termed it as a reciprocal action against a 2023 verdict of India’s Supreme Court which made Swiss multinational Nestle liable to pay a ‘higher’ rate of tax in India. Nestle had appealed to the SC that the company should be taxed at a lower rate because of certain provisions under DTAA that were added when it was amended in 2010. Due to the withdrawal of MFN status, Indian entities will pay the revised (10%) tax on income generated from Switzerland from January 1, 2025.

The Swiss government’s action against the legal interpretation of the existing bilateral agreement by India’s apex court came at a time when the Swiss Parliament is expected to ratify the Trade and Economic Partnership Agreement (TEPA) signed after decades of negotiations between India and the European Free Trade Association (EFTA) member States Switzerland, Norway, Iceland and Liechtenstein and India in early 2025.

While DTAA and TEPA are independent agreements, the timing of the Swiss announcement and the doubts it attempts to create among foreign investors over the credibility of India’s DTAA commitments can be a cause of concern as India’s readiness to accept TEPA was primarily rooted in an assurance given by EFTA members to invest $100 billion in India and create 1 million direct jobs in the country within 15 years of the operationalisation of TEPA.

Due to the same reason, withdrawal of MFN status may demand closer scrutiny of the promises India has offered under EFTA as and when it gets implemented through appropriate amendments to Indian regulations, experts say. “We have to follow the law of the land. The promise of bringing in investments cannot be a reason to not follow the law of the land. Reciprocation should not be based on verdicts of our courts”, says Ashwani Mahajan, National Co-Convener of Swadeshi Jagaran Manch (SJM). “It is highly objectionable on the part of the governments of the other countries to impose some conditions based on court orders. Investments are fine, but are not above legal rulings”, he adds.

The TEPA comprises 14 chapters with a main focus on market access related to goods, rules of origin, trade facilitation, trade remedies, sanitary and phytosanitary measures, technical barriers to trade, investment promotion, market access on services, intellectual property rights, trade and sustainable development and other legal and horizontal provisions. Under the agreement, EFTA is offering 92.2% of its tariff lines which covers 99.6% of India’s exports. The EFTA’s market access offer covers 100% of non-agri products and tariff concession on Processed Agricultural Products (PAP).

The commerce ministry had stated that India is offering 82.7% of its tariff lines which covers 95.3% of EFTA exports of which more than 80% of imports are gold and the effective duty on gold remains untouched. The ministry also says that the sensitivity related to Production Linked Incentive (PLI) in sectors such as pharma, medical devices & processed food etc. have been taken while extending offers and sectors such as dairy, soya, coal and sensitive agricultural products are kept in exclusion list under the trade agreement.

Incidentally, in one of the first official responses from the Indian side on the Swiss decision, Randhir Jaiswal, official spokesperson of the Ministry of External Affairs (MEA) said TEPA could take precedence over DTAA and Switzerland may renegotiate DTAA with India. “My understanding is that with Switzerland, because of EFTA, the double taxation treaty we have is going to be re-negotiated. I don’t have an update on the MFN status”, he said in response to a question at MEA’s weekly press briefing on December 13.

The ratification of TEPA by Switzerland's Parliament could happen first. DTAA re-negotiation next.