This article was published in Financial Express on August 07 2026. Please click here to read the article.
The decades-old Income Tax Act, 1961, was streamlined and replaced by a succinct Income Tax Act, 2026. Normally, one would expect any further changes to be a part of the next Budget. The government has also clearly spelt out the mandate for the new Act – an exercise to make the law easier to understand, rather than change the legislation significantly per se.
However, as a salutary response to the economic disruptions and challenges arising from geopolitical developments, especially the U.S.-Iran conflict, the Centre set up an expert committee in April to recommend measures for attracting (including foreign) capital to realise the vision of Viksit Bharat. The first big-bang announcement thereafter was the removal of capital gains tax and tax on interest income of foreign investors in G-secs.
The government has introduced relaxations in other key areas to facilitate foreign investment. First, foreign companies providing capital goods, equipment, and components to contract manufacturers in India have been exempted from taxation. This has been extended from tax year 2030-31 to tax year 2040-41. Components stored in a warehouse in India for supply to the Indian contract manufacturer will also qualify for this exemption.
Also, to provide greater clarity and certainty, ‘specified electronic goods’ will include mobile phones, laptops and tablets, servers, and sub-assemblies of these finished products. This will prevent ambiguity in the eligibility of electronic products and also provide a sufficiently long road map for foreign firms entering into arrangements with Indian contract manufacturers. This will provide much-needed tax certainty to boost the Centre’s efforts to attract greater investment in electronics manufacturing.
Second, foreign companies procuring services from specified data centres in India have been exempt from taxation. To encourage investments in data centres, Budget 2026 provided for such an exemption till 31 March 2047 (which itself was a transformative intervention to offer long-term certainty to foreign investors).
However, the fine print specified a number of conditions which raised concerns about the practicality of implementing the salutary provisions. For instance, both foreign companies and the specified data centres in India had to be ‘notified’, which raised the spectre of the dreaded ‘license raj’ of yore. As a swift, decisive response to such concerns, the onerous conditions of ‘pre-notifications’ have been removed.
Further, besides the condition of local ownership of data centres in India, Indian companies are eligible for exemption even if they lease out data centres. While these are welcome steps, a nagging issue is the requirement for both foreign and Indian firms to furnish prescribed information. It is hoped that the requirement will be user-friendly and minimal.
Third, unitholders in business trusts (real estate investment trusts/infrastructure investment trusts) have been exempt from tax on dividend income (received as pass-throughs from special purpose vehicles [SPVs] under such trusts). In continuation of earlier policy steps, exemption is valid regardless of whether the SPVs opt to be taxed under the old regime (higher corporate tax rate with applicable deductions) or the concessional flat rate of corporate tax (with virtually no deductions).
This is a welcome move to make post-tax investment income attractive for unitholders as well as to encourage more SPV firms to opt for the simpler corporate tax regime. The only jarring note is the avoidable increase in surcharge by 15 per cent on SPVs’ income to make the measure ‘revenue-neutral’. The government should consider removing the additional surcharge as the overarching aim should remain a seamless transition to the new, simpler tax regime. That will led to greater tax buoyancy without worrying about a ‘points-based’ loss of revenue due to the dividend tax exemption.
Moreover, conditions requiring investment funds to have fund managers in India are now relaxed. Since liberalisation, the classic fund management structure adopted by PE/VC firms involved having both the fund entity and the fund management entity located outside India, even when 100 per cent of the investments were made in Indian firms. The favourable capital gains tax treatment in treaties with countries like Singapore and Mauritius were also strong factors for such PE/VC firms to structure their funds in these jurisdictions along with the fund management entities.
However, with the amendments in tax treaties as well as the reintroduction of capital gains tax in India, the attractiveness of localising these entities in jurisdictions like Singapore and Mauritius has diminished. Despite these developments, most funds continued to have fund management companies outside India for lack of tax certainty. The offshore fund itself would not be considered as having a taxable presence in India. This was the context in which Section 9A of the (old) Income Tax Act attempted to provide tax certainty.
However, due to a plethora of conditions in the said provision, hardly any PE/VC firm chose to relocate fund management operations to India. The current amendments are the most ambitious ever attempted, as they seek to remove the number of conditions (from 13 to just five) for the funds to be eligible for such exemption from any business tax outcome in India. Hopefully, PE/VC firms will now shed their reluctance and confidently relocate their fund management operations.
The amendments are a reminder of the government’s silent resolve to continue transformative reforms in tax policy and facilitate foreign investments to support India’s journey to Viksit Bharat by 2047. The stakeholders must take advantage of these measures and accelerate their investments in India.
