Why in the News?

• The Government has proposed several tax reforms through the Taxation and Other Laws (Amendment) Bill, 2026, including relaxation of tax rules for offshore funds, extension of tax incentives for electronics contract manufacturing, and new exemptions for data centres and foreign investors.

What’s in Today’s Article?

• Taxation Amendment Bill (Background, Key Highlights of the Proposed Reforms, Significance, etc.)

Background

• In recent years, India has introduced a series of tax reforms to attract global investments, strengthen domestic manufacturing, and position itself as a preferred destination for international fund management.
• However, industry stakeholders have argued that certain provisions under the Income-tax Act imposed restrictive conditions on offshore investment funds and created uncertainty for multinational companies operating in sectors such as electronics manufacturing and data centres.
• Following representations from industry and in view of evolving global economic conditions, the Government has proposed amendments through the Taxation and Other Laws (Amendment) Bill, 2026.
• The proposed changes aim to simplify the tax framework, improve ease of doing business, enhance India's competitiveness, and support key sectors such as electronics, financial services, mining, and digital infrastructure.

Key Highlights of the Proposed Tax Reforms

• Relaxation of Tax Conditions for Offshore Funds
  • The Bill proposes significant changes to the taxation framework governing Eligible Investment Funds (EIFs) or offshore funds managed from India.
  • At present, offshore funds are required to satisfy 13 conditions to ensure that their fund management activities in India do not constitute a taxable business presence.
  • The proposed amendments remove 8 out of these 13 conditions, thereby substantially easing compliance requirements.
• Conditions Proposed to be Removed
  • Minimum 25 investors in the fund.
  • Maximum 10% participation interest by a single investor.
  • Restriction on investing more than 25% of the corpus in a single entity.
  • Restriction on investments in associate entities.
  • Minimum monthly average corpus requirement of ₹100 crore.
  • Other structural conditions which are considered inconsistent with global fund management practices.
• Experts have observed that these provisions were not aligned with international fund structures and often discouraged offshore funds from locating their fund management operations in India.
• After the proposed amendments, offshore funds will primarily be required to satisfy only five key conditions:
  • The fund should not be a resident of India.
  • The fund should not directly or indirectly control or manage any business in India.
  • Investment by Indian residents should not exceed 5% of the corpus as on 1 April and 1 October of the relevant financial year.
  • The revised framework is also expected to create greater uniformity between offshore funds operating in India and those located in the International Financial Services Centre (IFSC).

Extension of Tax Incentives for Electronics Contract Manufacturing

• The Bill proposes to extend the tax exemption available to foreign companies supplying capital goods, machinery, equipment, or tooling to Indian electronics contract manufacturers.
• The tax exemption, which was earlier available until 2030-31, is proposed to be extended by ten years, up to 2040-41.
• The proposal is expected to benefit global electronics companies, particularly those adopting the contract manufacturing model in India, by providing long-term tax certainty and encouraging greater investment in domestic manufacturing.
• The Bill also introduces a new tax exemption for foreign companies involved in:
  • Storage of electronic components in customs-bonded warehouses.
  • Sale of such components to Indian contract electronics manufacturers.
  • The measure seeks to strengthen India's electronics manufacturing ecosystem by facilitating smoother supply chains and reducing tax-related uncertainties for multinational firms.
• Tax Relief for Data Centres
  • Recognising the rapid expansion of India's digital economy, the Bill proposes several measures to promote investment in data centre infrastructure.
  • The proposed amendments include:
    • Expanding the definition of an eligible data centre to include facilities operated through both ownership and leasing.
    • Removing the requirement for a separate Central Government notification for foreign companies procuring data centre services from specified facilities in India.
    • These measures are expected to reduce procedural hurdles and align the tax framework with prevailing commercial practices in the sector.
• Tax Holiday for Diamond Trading Entities
  • To strengthen India's position in the global diamond trade, the Bill proposes a 15-year tax holiday, extending up to 31 March 2041, for specified foreign companies operating in notified special zones.
  • The proposed exemption will apply to entities engaged as:
    • Mining companies
    • Sightholders
    • Brokers
    • Aggregators
    • Tender or auction entities
  • The exemption covers income earned from the sale of rough diamonds within the notified special zone.

Replacement of the Income-tax (Amendment) Ordinance, 2026

• The Bill also seeks to replace the Income-tax (Amendment) Ordinance, 2026, which was promulgated on 5 June 2026.
• The Ordinance had provided tax relief to Foreign Portfolio Investors (FPIs) by exempting:
  • Capital gains on investments in Government securities.
  • Withholding tax on such investments.
• According to the Government, the Ordinance was introduced to:
  • Mitigate the impact of external economic shocks.
  • Support domestic economic stability.
  • Encourage foreign capital inflows.
• The proposed Bill seeks to incorporate these provisions into permanent legislation while introducing additional tax measures based on stakeholder feedback received after the enactment of the Finance Act, 2026.

Significance of the Proposed Reforms

• The proposed amendments are expected to:
  • Position India as a more attractive destination for global fund management.
  • Enhance the competitiveness of the IFSC.
  • Provide long-term policy certainty to electronics manufacturers.
  • Promote investment in data centres and digital infrastructure.
  • Encourage foreign investment in Government securities.
  • Strengthen India's role in global value chains.
• Collectively, these measures align with broader government initiatives such as Make in India, Digital India, and efforts to improve the country's ease of doing business.