NITI Aayog’s recent suggestion to introduce an optional presumptive taxation scheme for foreign companies has sparked debate among tax experts. They warn that the proposal could conflict with the existing international tax norms and potentially lead to double taxation.
NITI Aayog suggests that the government could consider allowing foreign companies to pay taxes under a presumptive system, as an alternative to the existing profit attribution rules. However, experts argue that such a system may diverge from the globally accepted functions, assets, and risks (FAR)-based attribution framework, central to determining taxable profits for multinational enterprises operating through a Permanent Establishment (PE).
“Presently, the profit attribution to a permanent establishment follows the ‘separate and independent enterprise’ principle, treating the PE as a distinct entity from its head office for tax purposes. If the proposed regime operates as a de facto substitute for the present profit attribution, taxpayers may face challenges in claiming treaty benefits, increasing the risk for double taxation,” said Rahul Charkha, Partner, Economic Laws Practice. It is not necessary that the tax authorities of the foreign company’s home country will accept such a regime, particularly when bilateral tax treaties define how a PE is established and taxed. If a foreign firm unilaterally opts for the presumptive scheme, the corresponding foreign tax credit in its home jurisdiction may be denied, effectively resulting in double taxation.
While presumptive taxation is not new—India already applies it in sectors like shipping, airlines, and oilfield services, and countries such as Brazil have adopted similar approaches—the complexity for India lies in setting and regularly updating industry-specific profit margins. According to Vijay Iyer, National Transfer Pricing Leader, EY India, successful implementation would require “monitoring the regime, and international coordination with treaty partners to avoid double taxation or mismatches. If rates are set too high, India risks deterring investment and the reform may not achieve its stated objectives.”
Experts also flagged operational and interpretational hurdles. Disputes could arise over whether the new regime can coexist with tax treaty provisions, and whether counterpart tax authorities would recognize deemed profits attributed without a FAR-based analysis. “Determination of the right safe harbour rates, consideration of profits already offered to tax in India through other forms of presence, determining and validating the gross income base on which the safe harbour needs to be applied, etc,” said Sandeep Puri, Partner, Price Waterhouse & Co LLP, outlining key challenges in implementing the framework.
