FAQs on the Taxation and Other Laws (Amendment) Bill, 2026

FAQs on the Taxation and Other Laws (Amendment) Bill, 2026

I. Extension of Tax Exemption for Foreign Companies Supplying Capital Goods to Indian Contract Manufacturers

Q1. What is the existing tax exemption available to foreign companies?

Under the Income-tax Act, 2025, as amended by the Finance Act, 2026, certain foreign companies are exempt from tax on income earned from providing capital goods, machinery, equipment or tooling to an Indian contract manufacturer. The exemption is presently available up to the tax year 2030-31, provided prescribed conditions are fulfilled.

Q2. What conditions must be satisfied to claim this exemption?

The exemption can be claimed only if all of the following conditions are met:

• The ownership of the capital goods, machinery or tooling continues to remain with the foreign company.
• The equipment is operated by the Indian contract manufacturer under the foreign company’s overall control and direction.
• The contract manufacturer is an Indian resident company operating from a customs bonded area.
• The contract manufacturer manufactures electronic goods for the foreign company in return for consideration.

Q3. Where is this exemption incorporated in the Income-tax Act, 2025?

The relevant provision is contained in Serial No. 13A of Schedule IV to the Income-tax Act, 2025.

Q4. What changes have been proposed under the Taxation and Other Laws (Amendment) Bill, 2026?

The Bill proposes two major amendments:

• The existing exemption period is proposed to be extended by an additional ten years, allowing the benefit to continue until the tax year 2040-41.
• A statutory definition of “specified electronic goods” is proposed to eliminate uncertainty regarding the products covered by the exemption.

Q5. Which products are covered under the definition of “specified electronic goods”?

The proposed definition includes:

• Mobile phones;
• Laptops, tablets and all-in-one personal computers;
• Servers and ultra-small form factor (USFF) devices;
• Sub-assemblies used in the manufacture of the above products; and
• Hearables, wearables and accessories related to the above electronic products.

II. Changes in Tax Exemption for Foreign Companies Procuring Data Centre Services

Q1. What is the existing tax exemption available for foreign companies using Indian data centre services?

The Income-tax Act, 2025 grants a tax exemption to eligible foreign companies earning income through procurement of services from specified data centres located in India. This exemption is currently available up to the tax year ending 31 March 2047, subject to prescribed conditions.

Q2. What are the existing eligibility requirements?

The exemption presently applies where:

• The foreign company is notified by the Central Government.
• The foreign company neither owns nor operates the infrastructure or resources of the specified data centre.
• Sales to customers located in India are routed through an Indian reseller.
• The foreign company maintains and submits information in the prescribed manner.

Q3. Where is this provision contained?

The exemption is provided under Serial No. 13C of Schedule IV to the Income-tax Act, 2025.

Q4. What qualifies as a “specified data centre”?

A specified data centre is one that:

• Has been established under an approved Government scheme;
• Is notified by the Ministry of Electronics and Information Technology; and
• Is owned and operated by an Indian company.

Q5. How is the Indian data centre operator taxed?

The Indian company operating the data centre continues to be taxed under the normal provisions of the Income-tax Act. Where it is an associated enterprise of the foreign cloud service provider and is compensated on a cost basis, a 15% safe harbour margin is available for determining the arm’s length remuneration.

Q6. What amendments have been proposed?

The Bill proposes to:

• Eliminate the requirement for Government notification of the foreign company.
• Remove the notification requirement for the specified data centre.
• Permit leased ownership models for Indian data centres.
• Allow the Central Government to prescribe eligibility conditions through rules.

Q7. Why has the leased ownership model been introduced?

The amendment recognises that many Indian data centres function from leased premises rather than owned infrastructure. Allowing leased facilities broadens eligibility and reflects prevailing industry practices.

Q8. Why are the notification requirements being removed?

Instead of relying on Government notifications, compliance will be ensured through prescribed reporting requirements. This is intended to simplify procedures and improve the ease of doing business.

III. Tax Exemption for Foreign Mining Companies Selling Rough Diamonds

Q1. What new exemption has been proposed?

The Bill introduces a fresh tax exemption for eligible foreign companies earning income from the sale of rough diamonds.

Q2. Which entities can claim the exemption?

Eligible entities include:

• Foreign diamond mining companies;
• Sightholders;
• Brokers;
• Aggregators; and
• Tender or auction entities involved in the rough diamond trade.

Q3. What conditions must be fulfilled?

The exemption is available where:

• The sale takes place in a notified Special Notified Zone (SNZ), such as Mumbai or Surat; and
• The prescribed information is maintained and furnished to the authorities.

Q4. What is meant by “rough diamonds”?

For this purpose, rough diamonds refer to unworked or minimally processed diamonds falling under specified Customs Tariff classifications and accompanied by a valid Kimberley Process Certificate.

Q5. How long will the exemption remain available?

The proposed exemption will be available up to the tax year ending 31 March 2041.

IV. Tax Exemption for Foreign Companies Storing Components in Customs Bonded Warehouses

Q1. What new relief has been proposed?

A tax exemption is proposed for foreign companies earning income from storing components in customs bonded warehouses and supplying them to Indian contract manufacturers engaged in producing specified electronic goods.

Q2. Who can claim the exemption?

The benefit is available to foreign companies that store components in bonded warehouses for supply to eligible Indian contract manufacturers.

Q3. What are the key conditions?

The exemption applies if:

• Income arises from the sale of stored components;
• The components are supplied to a contract manufacturer producing electronic goods for a foreign company; and
• Prescribed reporting requirements are complied with.

Q4. Who is regarded as a contract manufacturer?

A contract manufacturer is an Indian company manufacturing specified electronic goods on behalf of a foreign company while operating from a customs bonded area.

Q5. What is a customs bonded area?

It refers to a warehouse covered under Section 65 of the Customs Act, 1962.

Q6. What is the duration of the proposed exemption?

The exemption is proposed to remain available until the tax year ending 31 March 2041.

Q7. Which products qualify as specified electronic goods?

The expression covers:

• Mobile phones;
• Laptops, tablets and all-in-one computers;
• Servers and ultra-small form factor devices;
• Sub-assemblies of these products; and
• Hearables, wearables and their related accessories.

V. Dividend Exemption for Unit Holders of Business Trusts

Q1. What is the existing tax treatment?

Business trusts distribute dividends received from their Special Purpose Vehicles (SPVs) to unit holders. At present, such dividends are exempt only where the SPV is taxed under the old tax regime.

Q2. What amendment has been proposed?

The Bill proposes to extend the exemption to dividends received from SPVs that have opted for the new tax regime.

Q3. Who will benefit?

Unit holders receiving dividends from eligible SPVs under the new tax regime will continue to enjoy tax exemption.

Q4. Is any additional tax proposed?

Yes. A surcharge of 15% is proposed to be levied on SPVs operating under the new tax regime.

Q5. Why has this amendment been introduced?

The Finance Act, 2026 restructured the Minimum Alternate Tax (MAT) framework, encouraging companies to migrate to the new tax regime. Without this amendment, unit holders could lose the dividend exemption solely because the SPV changed its tax regime. The proposed changes preserve the pass-through nature of business trusts while offsetting the revenue impact through an additional surcharge on the SPV.

VI. Relaxation of Conditions for Eligible Investment Funds

Q1. When is income deemed to accrue or arise in India?

Income is treated as accruing or arising in India if it is directly or indirectly connected with:

• Assets situated in India;
• Property located in India;
• A business connection in India; or
• Transfer of a capital asset situated in India.

Q2. What is the existing framework for eligible investment funds?

The Income-tax Act, 2025 provides that eligible investment funds managed through qualifying fund managers are not regarded as having a business connection in India, subject to specified conditions. Currently, there are thirteen conditions for investment funds and four conditions for eligible fund managers.

Q3. What changes are proposed?

To simplify the regime, the Bill proposes to reduce the qualifying conditions for eligible investment funds from thirteen to five.

Q4. What are the proposed five conditions?

An eligible investment fund should:

1. Be a non-resident fund.
2. Be resident in a country or territory having a tax treaty with India or a notified jurisdiction.
3. Ensure that investment by Indian residents does not exceed 5% of its corpus.
4. Not carry on or control any business in India.
5. Ensure that no person acting on its behalf creates a business connection in India, except through the permitted activities of an eligible fund manager.

Q5. What is the objective of these amendments?

The proposed relaxation aims to encourage global fund managers to establish operations in India while ensuring that foreign investment funds do not inadvertently create a taxable business presence. The changes are also intended to enhance tax certainty and strengthen India’s position as a preferred fund management destination.

FAQs

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Also Read: FAQs and Guidance notes on Forms under Income-tax Rules, 2026

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