NITI Aayog Proposes Presumptive Taxation for Foreign Companies

Presumptive Taxation Latest News

• NITI Aayog has proposed an optional presumptive taxation regime for foreign companies to reduce tax disputes, simplify compliance, and attract greater foreign direct investment into India.

Introduction

• India has emerged as one of the most attractive investment destinations in the world, with cumulative foreign direct investment (FDI) inflows crossing USD 1 trillion between April 2000 and March 2025. 
• However, persistent taxation disputes, particularly around Permanent Establishment (PE) rules and profit attribution, have been a recurring concern for multinational companies. 
• To address these issues, NITI Aayog has proposed an optional presumptive taxation regime for foreign companies, aiming to reduce litigation, improve compliance, and encourage higher FDI inflows.

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Understanding Presumptive Taxation

• Presumptive taxation is a simplified tax regime where taxable income is calculated as a fixed percentage of gross revenue, rather than through detailed accounting. 
• This mechanism reduces the compliance burden, avoids prolonged disputes, and provides certainty to businesses.
• India already uses presumptive taxation in limited sectors such as:
  • Electronics manufacturing services: 25% of gross payments are deemed as profit.
  • Non-resident cruise operators: 20% of gross receipts deemed as profit.
• NITI Aayog’s proposal seeks to extend this principle across sectors, particularly those involving digital services, technology, and offshore supply, where disputes are more common.

Key Features of NITI Aayog’s Proposal

• The proposed presumptive tax system introduces several reforms designed to simplify taxation for foreign companies:
  • Optional Participation – Foreign companies may choose between the presumptive regime and continue under the regular tax framework.
  • Sector-Specific Rates – Profit attribution percentages would vary across industries, ranging between 5% and 30%. For example, in technology, 5% of offshore supply and 20% of onshore services could be deemed profitable.
  • Safe Harbour Protection – Companies opting for presumptive taxation would not face litigation over the existence of a PE for those activities.
  • Reduced Compliance Burden – Firms would not need to maintain exhaustive local books or undergo prolonged audits.
  • Flexibility – Companies could revert to the regular regime if their actual profit is lower than the presumptive rate.

Rationale Behind the Proposal

• Tackling PE and Profit Attribution Disputes
  • Determining whether a foreign company has a Permanent Establishment in India has often been subjective, especially in the digital economy. Disputes on profit attribution can last 6-12 years, increasing costs for businesses. A presumptive taxation regime provides certainty and sidesteps prolonged litigation.
• Aligning with Global Practices
  • The proposal suggests codifying PE and profit attribution rules in domestic law while aligning them with OECD and UN tax models. This ensures India remains internationally competitive while protecting its source-based taxing rights.
• Enhancing FDI and Ease of Doing Business
  • By offering clarity, predictability, and a reduced compliance burden, the regime is expected to attract higher-quality FDI, particularly in digital and service-based industries.

Industry Reactions

• Experts say that the scheme provides a clear path forward by eliminating ambiguities around PEs, reducing disputes, and lowering the costs of doing business.
• Also,  sector-specific benchmarks allow businesses to plan operations efficiently, offering both clarity and reduced litigation risks.

Challenges in Implementation

• Revenue Concerns – The government must ensure that the regime does not lead to significant revenue leakage.
• Sector-Specific Rates – Determining fair presumptive percentages for multiple industries will be complex.
• Centre–State Coordination – While direct taxes fall under the Centre, some coordination with states will be required.
• Data Privacy Issues – Safe harbour provisions may raise concerns about handling corporate financial data.

Way Forward

• The NITI Aayog report recommends a multi-pronged approach, including:
  • Expanding Advance Pricing Agreements (APA) and Mutual Agreement Procedures (MAPs) for quicker dispute resolution.
  • Establishing a formal consultation framework with industry bodies before major tax reforms.
  • Considering binding arbitration for international disputes.
• The Finance Ministry is expected to examine the proposal and may include it in future budgetary reforms, potentially constituting a working group to draft provisions and consult stakeholders.

Source : FE | BS