A. Promoting investments in India
Tax holiday for foreign companies procuring services from Indian data centres
Any income accruing or arising in India or deemed to accrue or arise in India to a foreign company by way of procuring data centre services from a specified data centre in India would be eligible for a tax holiday up to 31 March 2047, subject to the condition that all sales by such foreign company to users located in India are made through an Indian reseller entity and that such foreign company does not own or operate any physical infrastructure or resources of the data centre.
Safe habour margin for data centre entities
A safe harbour margin of 15% on costs is proposed for companies providing data centre services to related entities.
Tax holiday for foreign companies providing capital equipment to Indian contract manufacturers
A foreign company earning income from providing capital goods, equipment, or tooling to an Indian contract manufacturer company located in a custom bonded area who produces electronic goods on behalf of such foreign company is exempt up to tax year 2030–31.
Extension of period of tax holiday for units in International Financial Services Centre (IFSC) and rationalisation of tax rate
The period of tax holiday available to units located in an IFSC shall be extended to 20 consecutive years, to be selected at the option of the taxpayer, out of a total span of 25 years. A concessional tax rate of 15% (plus surcharge and cess) shall apply during the non-tax holiday period.
Deemed dividend exemption for Global Treasury Centres is proposed to be restricted to cases where the counterparty group entity is located in a notified country or territory outside India.
B. Ease of doing business
Information Technology Services (ITS) safe harbour rules
Software development services, IT-enabled services, knowledge process outsourcing services, and Contract R&D services (related to software development) are proposed to be consolidated into a single safe harbour category of ‘Information Technology Services’ with a uniform safe harbour margin of 15.5%.
The eligibility threshold for availing safe harbour for ITS is proposed to be enhanced from INR300 crore to INR2,000 crore for value of international transactions.
It is proposed that safe harbour for IT services be granted through an automated, rule-based process and can be continued for a period of 5 years at the option of the taxpayer.
APA-related amendmentss
A unilateral APA process is proposed to be fast-tracked with a targeted conclusion within two years for IT services providers, which is further extendable by six months upon the taxpayer’s request. The facility of filing modified returns is proposed to be extended to the associated enterprises as well.
C. Key policy-related measures for financial services
- Proposal for setting up a ‘High Level Committee on Banking for Viksit Bharat’ to comprehensively review the sector and to align it with India’s next growth phase
- Comprehensive review of Foreign Exchange Management Act (FEMA) (Non-Debt Instruments) Rules proposed for a contemporary investment framework
- Proposal to introduce a market-making framework and total return swaps (TRS) for corporate bonds to enhance liquidity
- Persons Resident Outside India (PROIs) to be permitted to invest in listed Indian equities with increased limits from 5% to 10% per individual, and from 10% to 24% in aggregate under the Portfolio Investment Scheme
- A dedicated INR100-billion Small and Medium Enterprises (SME) Growth Fund has been introduced. Additionally, to enable access to risk capital to micro enterprises, an INR20 billion top-up is proposed to the Self-Reliant India Fund.
D. Rationalisation of provisions and miscellaneous changes
Rationalisation of buy-back provisions
The tax provisions with respect to buy-back of shares are proposed to be rationalised by taxing the consideration on buy-back of shares as capital gains. Promoters (including those holding more than 10% shares) are required to pay an additional income tax on gains arising from a buy-back as follows:
| Type of capital gains |
Promoter being a domestic company |
Other promoters |
| Short term |
2% |
10% |
| Long term |
9.5% |
17.5% |
Rationalisation of penalty provisions
The imposition of penalty for under-reporting and misreporting of income is now required to be made part of the assessment order itself. Furthermore, interest on the penalty will be kept in abeyance during the pendency of appeal by the first appellate authority.
Penalties for certain defaults, namely failure to get accounts audited, failure to furnish transfer pricing audit report, failure to furnish statement for financial transactions or reportable accounts, are converted into fees.
Immunity from penalty which was previously available only for under-reporting of income is now extended to cases of misreporting as well. However, in such cases, the taxpayer would be required to pay 100% of the tax amount as additional income tax over and above the tax and interest due, in addition to the previously applicable conditions.
Rationalisation of prosecution provisions
The nature of imprisonment for most offences is changed from ‘rigorous imprisonment’ to ‘simple imprisonment’, making the punishment less severe. The maximum punishment for most offences is reduced from seven years to two years (three years for repeated offences). Graded thresholds are introduced for offences based on the quantum of tax evaded. Certain offences (e.g., TDS on benefits and perquisites, failure to produce accounts and documents) are fully decriminalised and will now attract only a fine.
Retrospective amendment on time limit for passing of assessment order
The controversy regarding the time limit for passing assessment orders, specifically whether the period taken by the Dispute Resolution Panel (DRP) should be included in the computation of the time limit for passing the final assessment order, has now been clarified. A retrospective amendment has been proposed to section 144C, to clarify that the additional time provided under section 144C is available in cases where the DRP route is followed. This amendment ensures that the time taken by the DRP is not subsumed within the general time limits under sections 153 or 153B, but is instead in addition to those limits.
Removal of interest deduction against dividend income/mutual fund income
Deduction for interest expenses incurred in connection with earning dividend income or income from mutual fund units has been withdrawn.
