India's MFN tweak: Switzerland signals room for rethinking trade deals

Switzerland's revocation of 'most favoured nation' (MFN) status in its tax treaty with India doesn't signal any possible deterioration of trade and investment between the two countries. It, however, does appreciate India's heightened sensitivity to consensual changes in international tax agreements. Bern's reaction to India's altered stance on automatic measures to make trade non-discriminatory could, of course, be replicated by other countries. Yet, trade-distorting outcomes, if any, will be restricted to tax treaties they have with India. Essentially, India's position will prevail and can be renegotiated, which works to the country's benefit across the tapestry of its trade agreements.

The altered scenario arose after the Supreme Court ruled last year that changes in MFN status, which apply when a country joins a trade bloc, will need to be notified separately. The issue was over OECD expanding its membership and India having to offer these new members the same terms it has with older members. OECD treats all its members equally, and this automatically expands the scope of MFN status non-members may have with even a single nation in the grouping. The Supreme Court verdict makes it incumbent on GoI to negotiate trade deals through mutual agreement, instead of relying on a templatised mechanism. The deliberative approach should improve outcomes, and avoid unintended ones.

The MFN tool is not perfect, which has kept alive the provision for it to be revoked. Stronger agreements can be arrived at through negotiation that serves bilateral interests better. These can come in handy during phases of rising trade protectionism, such as now. India is now at a position to better communicate its reservations over trade mechanisms that require intensive scrutiny over rules of origin. Being able to do so without doing any material damage to bilateral trade and investment is a considerable achievement. The Swiss reaction ought to trigger consent-building capability in India's international tax agreements.