On the issues with Supreme Court’s MFN verdict – A verdict that hampers international law obligations

Source: This post on the issues with Supreme Court’s MFN verdict has been created based on the article “A verdict that hampers international law obligations” published in The Hindu on 8^th November 2023.

UPSC Syllabus Topic: GS Paper 2 International relations – Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.
GS Paper 3 Indian Economy – Mobilization of resources (Taxation).

News: This article discusses the issues with the recent Supreme Court verdict on the application of MFN status.

A detailed article on the MFN verdict controversy can be read here.

Read more about MFN Status here.

What are the issues with the ruling?

According to the author, the verdict has the following lacunae:

1. Harms Ease of Doing Business in India:
   a. Tax Burden: This ruling will impose a tax burden estimated to be ₹11,000 crore on foreign investors.
   b. Retrospective application of laws: It may also lead to opening past cases.
   c. Uncertainty in Tax Policy: By both legislative and judicial pronouncements.
2. Defeats the purpose of MFN status: MFN status, by definition, refers to non-discriminatory standards in economic treaties. It ensures that future benefits given to a third country by one of the treaty-signing countries become automatically available to its treaty partners.
   For instance, if country A and country B have signed a treaty and country A later signs a treaty granting certain benefits to country C, these benefits should automatically be made available to country B.
3. Issues with the Doctrine of Dualism: The Supreme Court had moved away from this principle in cases such as the Vishakha and Puttaswamy case. It meant that domestic law would be interpreted to not contradict India’s obligations under international law.
   This approach ensured that progressive international law is given effect by the courts to protect the rights of citizens even if there is no domestic law.

Terminology used:

Doctrine of dualism: It implies that international law is not enforceable domestically till it is transformed into municipal law through enabling legislation.

Question for practice:

Critically analyze India’s approach to the Most Favored Nation provision in tax treaties.