NEW DELHI: Government think tank Niti Aayog has proposed an optional industry-specific presumptive taxation scheme for foreign companies. The proposal is aimed at enhancing tax certainty and predictability for foreign investors, which Niti Aayog identifies as a critical impediment to maximizing Foreign Direct Investment (FDI) inflows.
It has warned that existing complexities and ambiguities in rules governing permanent establishments (PE) and profit attribution have led to significant tax uncertainty and compliance burdens for multinationals. It says the lack of clear, objective standards has resulted in protracted litigation, with major PE disputes often taking anywhere from 6 to 12 or more years to reach a final resolution in the courts.
A PE is the business presence of a foreign company in a host country that incurs income or tax liability. Under presumptive taxation, businesses are allowed to declare a fixed percentage of their income as taxable profit, and are thus taxed on that profit instead of calculating all the expenses and then deducting it.
India already applies presumptive taxation for some sectors. For example, foreign companies providing certain Electronics Manufacturing Services, deem 25% of gross payments as profit. For non-resident cruise ship operators, 20% of gross receipts are deemed as taxable profits. Niti Aayog’s proposal builds on India’s existing use of presumptive tax.
“Prescribing sector-specific guidance offers businesses a practical framework to plan their operations and tax liabilities in advance…. For foreign investors, the advantages are clarity in compliance, reduction in litigation risk, lower costs of doing business, and improved ease of operations in India,” says Vishwas Panijar, Partner, NangiaNXT.
According to Niti Aayog, a presumptive tax regime would provide investors with a clear framework, allowing them to budget for Indian taxes with certainty, thereby making India a more attractive investment destination.
It further says tax officers would no longer need to perform complex audits and gather extensive evidence for companies that opt in, lessening the compliance burden for taxpayers, particularly new entrants.
Beyond presumptive taxation, NITI Aayog has proposed a multi-pronged strategy to align the tax system with the "Viksit Bharat by 2047" vision. It calls for a robust overhaul of dispute mechanisms, specifically recommending the expansion of Advance Pricing Agreement (APA) and Mutual Agreement Procedure (MAP) programs.
It also stresses the need to codify clear PE and profit attribution principles within domestic law, aligning with international standards (OECD and UN Models) while retaining India's source-based taxing rights. The think tank has also emphasized the institution of formal and transparent mechanisms for mandatory public consultation with industry bodies for all significant tax policy changes affecting international investors.