Taxation and Other Laws (Amendment) Bill, 2026 Proposes Major Tax Reforms to Boost Investment

Recent Developments:

• The Government has introduced the Taxation and Other Laws (Amendment) Bill, 2026 proposing wide-ranging tax reforms aimed at attracting foreign investment, strengthening manufacturing and enhancing tax certainty.
• The Bill proposes relaxation of tax conditions for offshore investment funds, extension of tax incentives for electronics contract manufacturing, tax relief for data centres, and exemptions for certain foreign investors.
• The Bill also seeks to replace the Income-tax (Amendment) Ordinance, 2026, which provided tax relief to foreign investors in Government securities.

Background:

Need for Tax Reforms:

• India has undertaken several tax reforms in recent years to attract global capital, strengthen domestic manufacturing and emerge as a preferred destination for international fund management.
• Industry stakeholders have argued that certain provisions under the tax framework imposed restrictive conditions on offshore investment funds and created compliance challenges for multinational companies.
• Sectors such as electronics manufacturing, data centres, digital infrastructure and financial services have sought greater policy certainty and a more competitive tax regime.
• In response to stakeholder representations and changing global economic conditions, the Government has proposed amendments through the Taxation and Other Laws (Amendment) Bill, 2026.
• The proposed reforms seek to simplify the tax framework, improve Ease of Doing Business (EoDB), enhance India's competitiveness and support strategic sectors of the economy.

Key Highlights of the Proposed Tax Reforms:

Relaxation of Tax Conditions for Offshore Funds:

• The Bill proposes significant changes in the taxation framework governing Eligible Investment Funds (EIFs) or offshore investment funds managed from India.
• At present, offshore funds are required to satisfy 13 conditions to ensure that fund management activities undertaken in India do not create a taxable business presence.
• The proposed amendments seek to remove 8 of the existing 13 conditions, thereby substantially reducing compliance requirements.

Conditions Proposed to be Removed:

• Requirement of a minimum of 25 investors in the fund.
• Restriction limiting a single investor's participation interest.
• Restriction on investing more than a specified proportion of the corpus in a single entity.
• Restriction on investment in associate entities.
• Requirement relating to minimum monthly average corpus size.
• Other structural conditions considered inconsistent with international fund management practices.

Conditions Proposed to Continue:

• The fund should not be a resident of India.
• The fund should not directly or indirectly control or manage any business in India.
• Investment by Indian residents should remain within the prescribed threshold of the corpus during the relevant financial year.
• Other core safeguards intended to prevent tax avoidance and artificial business presence in India will continue.

Expected Impact on Fund Management Sector:

• The revised framework is expected to improve India's attractiveness as a destination for global fund management activities.
• The reforms are expected to bring greater alignment between offshore funds operating from India and those located in the International Financial Services Centre (IFSC).
• The changes may encourage foreign funds to appoint India-based fund managers without triggering adverse tax consequences.

Extension of Tax Incentives for Electronics Contract Manufacturing:

Extension of Existing Incentives:

• The Bill proposes to extend tax exemptions available to foreign companies supplying capital goods, machinery, equipment or tooling to Indian electronics contract manufacturers.
• The tax incentive, earlier available up to 2030–31, is proposed to be extended by ten additional years up to 2040–41.

New Exemptions for Electronics Supply Chains:

• The Bill introduces a new tax exemption for foreign companies involved in:
• Storage of electronic components in customs-bonded warehouses.
• Sale of such components to Indian electronics contract manufacturers.
• The measure seeks to facilitate efficient supply chains and reduce tax-related uncertainty for multinational corporations.

Expected Benefits:

• The proposal is expected to provide long-term policy certainty for global electronics companies.
• The reforms are likely to strengthen India's position within global electronics value chains.
• The measures support broader initiatives aimed at expanding domestic electronics manufacturing under Make in India.

Tax Relief for Data Centres:

Proposed Measures:

• The Bill proposes several tax-related measures to promote investment in data centre infrastructure.
• The definition of an eligible data centre is proposed to be expanded to include facilities operated through both ownership and leasing arrangements.
• The requirement for separate Central Government notification for certain foreign companies procuring data centre services from specified facilities is proposed to be removed.
• The reforms seek to align the tax framework with prevailing commercial practices in the digital economy.

Significance:

• The measures are expected to reduce procedural hurdles for investors.
• The reforms support India's ambition to emerge as a global hub for cloud computing, digital infrastructure and AI-enabled services.

Tax Holiday for Diamond Trading Entities:

Proposed Exemption:

• The Bill proposes a 15-year tax holiday extending up to 31 March 2041 for specified foreign entities operating in notified special zones.
• The exemption is proposed for entities engaged as:
• Mining companies.
• Sightholders.
• Brokers.
• Aggregators.
• Tender or auction entities.
• The exemption covers income earned from the sale of rough diamonds within notified special zones.

Replacement of the Income-tax (Amendment) Ordinance, 2026:

Background:

• The Bill seeks to replace the Income-tax (Amendment) Ordinance, 2026, promulgated on 5 June 2026.
• The Ordinance provided tax relief to Foreign Portfolio Investors (FPIs) investing in Government securities.

Key Provisions of the Ordinance:

• Exemption from capital gains tax on investments in Government securities.
• Exemption from withholding tax on specified investments.
• Measures aimed at encouraging foreign capital inflows and supporting domestic financial stability.

Significance of the Proposed Reforms:

Economic Significance:

• The reforms are expected to make India a more attractive destination for global fund management.
• The amendments may enhance the competitiveness of the International Financial Services Centre (IFSC).
• The measures provide long-term tax certainty for electronics manufacturers and global investors.
• The reforms may promote investment in digital infrastructure, cloud services and data centres.
• The proposals are expected to encourage foreign participation in Government securities.
• The reforms may strengthen India's integration into global value chains and international production networks.

Policy Significance:

• The reforms complement flagship initiatives such as Make in India, Digital India and efforts to improve the Ease of Doing Business.
• The amendments reflect India's strategy of combining tax competitiveness with manufacturing expansion and financial sector development.

Related UPSC Concepts:

International Financial Services Centre (IFSC):

• An IFSC is a jurisdiction that provides financial services to non-residents and residents dealing with foreign currencies.
• India's IFSC is located at GIFT City.
• The IFSC aims to attract global financial institutions, fund managers and capital market participants.

Foreign Portfolio Investment (FPI):

• FPI refers to investments made by foreign investors in financial assets such as shares, bonds and Government securities.
• FPI flows influence exchange rates, capital markets and external sector stability.

Customs-Bonded Warehouse:

• A customs-bonded warehouse is a facility where imported goods can be stored without immediate payment of customs duty.
• Such warehouses support efficient supply chain management and export-oriented manufacturing.

Global Value Chains (GVCs):

• GVCs refer to the international fragmentation of production processes across multiple countries.
• Integration into GVCs enhances exports, technology transfer, productivity and employment generation.

Conclusion:

• The Taxation and Other Laws (Amendment) Bill, 2026 represents a significant step towards creating a more competitive and investment-friendly tax environment.
• By simplifying tax rules, encouraging manufacturing, promoting digital infrastructure and attracting foreign capital, the proposed reforms seek to strengthen India's position as a global investment and production hub.
• Effective implementation of these reforms can enhance economic growth, improve investor confidence and support India's long-term development objectives.

Value Addition for UPSC:

Quick Revision Facts:

• Taxation and Other Laws (Amendment) Bill, 2026 aims to simplify tax rules and attract investment.
• Eligible Investment Funds (EIFs) are offshore investment funds that may qualify for tax exemptions subject to prescribed conditions.
• International Financial Services Centre (IFSC): India's global financial hub located at GIFT City.
• Foreign Portfolio Investors (FPIs) invest in financial securities without acquiring management control.
• Customs-Bonded Warehouses allow storage of imported goods without immediate customs duty payment.
• Global Value Chains (GVCs) involve cross-border production networks linking multiple economies.
• Ease of Doing Business (EoDB) reforms aim to reduce compliance burdens and improve the investment climate