EUROPEAN FREE TRADE ASSOCIATION - ECONOMY

European Free Trade Association - ECONOMY

NEWS: Switzerland suspended the Most Favoured Nation (MFN) status under its Double Taxation Avoidance Agreement (DTAA) with India.

  • In response, the Ministry of External Affairs (MEA) indicated that the treaty may need renegotiation in light of India’s trade agreement with EFTA countries.

 

WHAT’S IN THE NEWS?

About the European Free Trade Association (EFTA)

  • Definition: EFTA is an intergovernmental organization comprising four countries not part of the European Union (EU):

·         Iceland, Liechtenstein, Norway, and Switzerland.

  • History:

·         Established in 1960 to promote free trade and closer economic cooperation in Europe.

·         Original members included Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the UK.

  • Exits:

·         Denmark and the UK left in 1972 to join the European Economic Community (EEC).

·         Portugal left in 1985 to join the EEC.

  • Milestone: EFTA’s first Free Trade Agreement (FTA) was signed with Spain.

 

India-EFTA Trade Agreement (March 2024)

  • Signed on 10th March 2024: India entered into a trade pact with the four EFTA nations.
  • Investment Commitment:

·         EFTA pledged $100 billion in investments over 15 years.

·         Focus on joint ventures to help India diversify imports, especially away from China.

  • Impact on India:

·         Potential economic activity and job creation in return for granting market access to EFTA.

·         Expected gains in India’s services sector, powering growth further.

  • Historic Legal Commitment:

·         This is the first time an FTA includes a legal commitment to promote target-oriented investments and job creation.

Norway’s Sovereign Wealth Fund

  • Key Financial Source:

·         Norway’s $1.6 trillion sovereign wealth fund, the largest in the world, plays a crucial role.

·         In 2023, the fund posted a record profit of $213 billion, driven by investments in technology stocks.

Switzerland’s Elimination of Import Duties

  • Policy Change:

·         Effective January 1, 2024, Switzerland eliminated import duties on all industrial goods for all countries.

  • Impact on India:

·         Industrial goods constitute 98% of India’s $1.3 billion merchandise exports to Switzerland (FY2023).

·         Despite tariff eliminations under the India-EFTA deal, India’s goods may face stiffer competition.

·         Affected sectors include chemicals, consumer goods, vehicles, and clothing.

Supreme Court’s Ruling and Nestle SA Case

  • Background: Switzerland cited the 2023 Indian Supreme Court ruling in the Nestle SA case as a reason for withdrawing MFN status.
  • Key Case Details:

·         Issue: Whether a government notification is required to enforce the MFN clauses under India’s tax treaties.

·         Ruling: The court ruled that MFN clauses do not automatically apply. A government notification is essential since MFN clauses alter provisions of the Income Tax Act (IT Act).

  • Specifics of the Case:

·         Nestle’s Argument: The MFN clause should apply automatically to countries joining the OECD after 1994.

·         Switzerland’s Action: Switzerland unilaterally reduced the tax rate on dividends for Indian firms from 10% to 5%.

    • Justification: India’s treaties with Lithuania and Colombia (OECD members in 2018 and 2020).

·         Indian Government’s Stand:

    • MFN benefits apply only to countries that were OECD members at the time the treaty was signed (1994 for Switzerland).
    • MFN benefits are not automatic and require explicit government notification.

·         Supreme Court Verdict: The SC upheld the Indian government’s stand that MFN benefits need a formal notification to be effective.

Conclusion

  • Switzerland’s suspension of the MFN clause reflects its response to both the India-EFTA deal and the Supreme Court’s interpretation of India’s tax treaties.
  • While India’s trade agreement with EFTA offers investment and job opportunities, Switzerland’s duty elimination poses challenges for Indian exports.
  • The MFN-related complexities underscore the need for clear policy renegotiations to ensure mutual benefits in trade and taxation frameworks.

Source: https://indianexpress.com/article/upsc-current-affairs/upsc-essentials/knowledge-nugget-european-free-trade-association-efta-switzerland-nestle-9729587/