India’s Most Favoured Nation (MFN) approach

 GS Paper 3

 Syllabus: Liberalization, International Trade

Source: IE

 Context: The Supreme Court’s recent decision on tax treaties sheds light on India’s Most Favoured Nation (MFN) approach.

What is the Most Favoured Nation (MFN)?

 It is a principle in international trade and diplomacy that promotes equal treatment among trading partners. When a country grants MFN status to another, it agrees to extend the same trade privileges and favourable terms to that partner as it does to its most favoured trading partner.

Explanation:

For example, if Country A gives Country B MFN status, it must offer the same trade benefits to Country B as it does to its best trading partner, Country C. This ensures fairness and non-discrimination in international trade.

Legal Status of MFN:

 Article 1 of GATT 1994 mandates WTO member countries to grant Most Favoured Nation (MFN) status to each other, ensuring equal trade treatment. There can be exceptions, like bilateral trade agreements and special access for developing nations.

For instance, India initially granted MFN status to all WTO members, including Pakistan. However, India suspended Pakistan’s MFN status in 2019 due to security concerns, and Pakistan never reciprocated MFN status for India.

Background of the MFN Controversy?

In 2020, India changed its dividend tax policies, creating relative advantages for investors from certain countries. The treaties India separately negotiated with new members of the OECD gave investors from these countries a relative advantage due to lower tax rates.

Now, investors from France, the Netherlands, and Switzerland (Old OECD members) also started to look for lower tax rates benefits from India. However, controversy arose over the question of whether the lower tax rates should automatically apply to the three countries without any formal notification.

What did the court say?

Delhi High Court ruled that no formal notification was needed, and benefits could be given immediately to investors from the 3 countries as well.

SC judgement:

SC reversed this HC judgment saying that a formal notification is required for changes under the MFN clause, meaning benefits don’t apply automatically. As a result, companies in the old OECD countries (such as the Netherlands) receiving dividends from India can’t claim lower tax rates based on treaties with new OECD members like Slovenia and must follow the original treaty rate.

Implications of the judgement:

• The decision may lead to additional tax revenue for the Indian government but could potentially strain relations with tax treaty partners.

Benefits of Most Favored Nation (MFN) Status:

Major Issues with Most Favored Nation (MFN) Provision:

Key Actions to Address MFN Issues:

• Clarity and Notification: Establish clear and standardized notification requirements for invoking MFN to reduce ambiguity and disputes.
• Regular Treaty Reviews: Periodically review tax treaties to assess their economic benefits and adapt to changing economic conditions.
• Global Cooperation: Promote international cooperation and coordination on tax treaty matters to ensure consistency and fairness across jurisdictions.
• Independent Judicial Oversight: Ensure the inclusion of independent judicial members in tax treaty decision-making bodies, enhancing transparency and fairness.

Insta Links:

 MFN Status

Prelims Links: