Context: European multinational companies facing substantial tax demands in India are urging the Supreme Court to reconsider a landmark verdict. 

• The ruling, based on the Vienna Convention, interprets the Most Favoured Nation (MFN) clause in tax treaties.

Background:

• The October Supreme Court decision favored the tax department, doubling withholding tax for companies. 
• For Example:
  • Dividends earned by Dutch companies in India face a 10% withholding tax under the Double Tax Avoidance Agreement (DTAA).
  • The MFN clause allows a lower tax rate if India has a better deal with another country.
  • Dutch companies calculated tax at India’s lower rate of 5% with certain countries.
  • The tax department rejected this calculation, citing a lack of government notification.
  • The Supreme Court held that MFN tax provisions don’t automatically apply and that the Indian government must notify the lower tax rate.

Vienna Convention Framework:

• The review petitions call for adherence to the Vienna Convention on the Law of Treaties. 

This framework obligates parties to comply in good faith. The argument hinges on whether notification is necessary for the MFN clause to be operational.

What are the Most Favoured Nation (MFN)?

• The 164 members of the World Trade Organization commit to treating each other equally to benefit from the lowest tariffs, highest import quotas, and minimal trade barriers for goods and services. 
• This commitment to non-discrimination is termed Most Favoured Nation (MFN) treatment. 
• Exceptions:  
  • When members strike bilateral trade agreements or when members offer developing countries special access to their markets.
• Non-WTO Countries:
  • WTO members can impose whatever trade measures they wish without flouting global trading rules. Ex, Iran, North Korea, Syria, or Russian.
• Removal of MFN status:
  • There is no formal procedure for suspending MFN treatment.
  • India suspended Pakistan’s MFN status in 2019. Pakistan never applied MFN status to India.

News Source: Livemint