India: A Tax Overview

As India prepares for the new Income Tax Act 2025 to take effect in April 2026, the legislation marks a major simplification of the country’s tax framework, reducing the size of the existing law by nearly half and making navigation much simpler.

This article outlines the key corporate tax developments and policy shifts introduced under the new regime and examines the judicial trends that are shaping India’s evolving corporate tax landscape.

International Financial Services Centre

The Indian government has taken initiatives to develop an International Financial Services Centre (IFSC) to cater to overseas financial institutions to carry out activities relating to the flow of finance, financial products, and services across borders. Such IFSC is presently set up at the Gujarat International Finance Tech City (GIFT City). The recent Union Budget 2026 that was announced on 1 February 2026 indicates a clear policy direction strengthening IFSC’s competitiveness while also ensuring that tax benefits are reserved for genuine commercial activity:

• Extended Tax Holiday Period: Units in IFSC and Offshore Banking Units (OBUs) are now eligible for a 20‑year tax holiday, available over a 25‑year window (previously 10 out of 15 years). The benefit applies even for the existing units.
• Post‑Holiday Concessional Tax Rate: After the expanded tax holiday, eligible income of IFSC Units and OBUs will be taxed at 15% plus surcharge and cess, significantly lower than the earlier effective rate structure for foreign companies which is 35% plus surcharge and cess. This aims to make long‑term operations in IFSC more attractive.
• Tightened Rules on Group‑Entity Loans and Dividend Exclusions: For IFSC Treasury Centres, loans or advances between group entities will be excluded from the definition of “dividend” only where both entities are located outside India. This is intended to close a perceived loophole that could otherwise facilitate unintended dividend-shielding through intra-group “loans”.

Electronics Manufacturing in India

The Union Budget 2026 proposes that income arising in India to a foreign company from the provision of capital goods, equipment, or tooling to Indian contract manufacturers in the electronics sector will be exempt from Indian income tax. The exemption applies where the recipient is an Indian-resident contract manufacturer engaged in the production of electronic goods for the foreign company and operating from a customs-bonded area. The exemption will be available subject to prescribed conditions and will remain in force up to the tax year 2030–31.

Data Centres in India

Further, income earned by a foreign company from procuring data centre services from specified data centres in India will be exempt from Indian income tax. The exemption applies where the data centre is owned and operated by an Indian company and established under an approved scheme. It is further conditional upon the foreign company routing all sales to users located in India through an Indian-resident reseller. The exemption will be available subject to prescribed conditions and will remain in force up to 31 March 2047 (20 years). A safe harbour margin of 15% on cost for data‑centre services has also been announced in case the service provider in India is an associate enterprise.

IT and ITES Services

The Union Budget 2026 introduces several measures to enhance tax certainty for India’s IT and ITES service sectors. A major reform is the overhaul of safe harbour rules, with software development, Information Technology Enabled Services (ITeS), knowledge process outsourcing (KPO) and contract R&D activities being merged into a single category of “IT Services” now eligible for a uniform 15.5% safe harbour margin substantially lower than the current range of 17–24%. The threshold for availing safe harbour is also proposed to increase from INR300 crore to INR2,000 crore, enabling large service providers to benefit from the regime, while approvals will shift to an automated system with validity for five consecutive years.

Advance Pricing Agreements

The government also proposes a fast‑track unilateral advance pricing agreement (APA) mechanism for IT Services targeting completion within two years, providing an alternative to taxpayers with high‑value cross‑border transactions. To streamline the implementation of APAs, both the taxpayer and its associated enterprise (AE) will be permitted to file modified returns to give effect to the APA outcome, an option previously unavailable to AEs.

Buyback of Shares

The existing regime of taxing the proceeds of buyback of shares as “dividend” in the hands of the shareholders is proposed to be abolished. The Union Budget 2026 now proposes to tax buyback proceeds as “capital gains”. However, an additional tax is proposed to be levied on “promoter” shareholders as follows:

Non-resident shareholders will be eligible to claim applicable tax treaty benefits on the capital gain tax.

Judicial Trends in Corporate Taxation

The sanctity of Tax Residency Certificates (TRCs), especially those issued by tax-friendly jurisdictions, has increasingly come under scrutiny in the context of investigating potential tax avoidance or evasion. The Delhi High Court had earlier held that TRCs issued by a competent authority should be treated as conclusive evidence of residency, and that merely establishing investment structures in low-tax jurisdictions cannot, by itself, indicate tax evasion or treaty abuse. This came as a major relief to taxpayers. However, this position was challenged before the Supreme Court.

In a landmark judgment, the Supreme Court reversed the High Court’s decision by denying treaty benefits to the taxpayer, a Mauritius‑based entity. The key points that emanate from the decision include the following:

• The Supreme Court has endorsed a strict application of General Anti-Avoidance Rules (GAAR), permitting denial of treaty benefits where an investment structure lacks commercial substance or is primarily tax-driven. Further, now such GAAR provisions can also apply to grandfathered investments – ie, investments made before 1 April 2017, thereby significantly diluting the grandfathering protections.
• A TRC is necessary but not sufficient or conclusive for treaty eligibility. Tax authorities may examine effective control, decision-making, and economic substance to allow treaty protection. Further, the Court has reaffirmed the substance-over-form principle, allowing denial of treaty benefits to conduit or low-substance entities despite formal legal compliance.

This ruling signals a decisive judicial shift towards curbing treaty shopping and will likely prompt multinational groups to revisit their investment structures, documentation, and substance standards when investing in India.

In another landmark ruling, the Supreme Court decided on whether a fixed‑place permanent establishment (PE) is constituted in India where the taxpayer exercised extensive strategic and operational control over Indian hotels through the “Strategic Oversight Services Agreement” covering key personnel decisions, procurement and HR policies, pricing, branding, marketing, and bank account operations. The Court emphasised that the existence of a PE does not depend on exclusive office space or continuous physical presence and that even shared or temporary use of premises is sufficient where meaningful business functions are carried on. This judgment significantly heightens PE risk for non-resident entities providing management or oversight services in India. Foreign entities must carefully assess their operational involvement, as any real decision‑making or controlling functions, even if performed remotely, may create a fixed‑place PE.

The Bombay High Court, in a significant ruling, held that Dividend Distribution Tax (DDT) paid by an Indian company to its UK parent must be capped at 10% as per Article 11(2)(b) of the India–UK DTAA. The Court clarified that DDT is, in substance, a tax on the shareholder’s dividend income, and that merely shifting the incidence of taxation on the distributing company under domestic law does not change its character. Therefore, it was held that treaty provisions must prevail over domestic law and cannot be overridden by amendments that merely alter the point of collection. This ruling provides clarity on how DDT should be taxed in cross border situations and reinforces the principle that India must give full effect to treaty obligations when taxing dividend income of foreign shareholders.