Last Updated on October 4, 2025 12:30 am by BIZNAMA NEWS
R. Suryamurthy
India is preparing to introduce an optional presumptive taxation scheme aimed at ending long-standing disputes with multinational firms over how much of their income can be taxed in the country.
The proposal, released in a NITI Aayog working paper on Friday, seeks to resolve chronic uncertainty around Permanent Establishment (PE) rules and profit attribution – two pillars of international tax law that determine when a foreign firm has a taxable presence in India and how much profit should be attributed to it.
The Problem
Foreign direct investment (FDI) has surged to more than $50 billion annually, with cumulative inflows of $1.07 trillion since 2000. Yet investors remain wary of India’s tax regime. Cases like Vodafone’s retrospective taxation and prolonged PE disputes have given the country a reputation for unpredictability.
Legal battles – from Motorola and Rolls Royce in the 2000s to the Supreme Court’s Hyatt ruling in 2025 – illustrate how inconsistent interpretations have kept investors tied up in litigation for a decade or more. In some instances, Indian tax officers attributed up to 80% of global profits to local operations, while courts alternated between applying global ratios and treating Indian entities as independent businesses.
The result, NITI Aayog notes, is a “cost of time” that goes beyond tax liability. Litigation often stretches over 10 years, locking up capital and management bandwidth, and eroding confidence in India’s ease of doing business.
The Solution
To break the cycle, NITI proposes an optional, industry-specific presumptive tax regime. Under the scheme, foreign companies could opt to pay tax on a fixed profit percentage of their Indian revenues rather than undergo complex PE assessments.
Illustrative rates include:
• 10% for construction and oilfield services,
• 5% on equipment supply and 20% on related services,
• 30% for digital and e-commerce revenues,
• 20% for consultancy and software services,
• 15% for marketing and distribution support.
Opting in would give firms safe harbour protection, meaning tax authorities would not litigate PE existence for that activity. Firms believing their profits are lower could opt out and file regular returns.
Broader Reforms
The presumptive scheme is part of a wider package:
• Codifying PE and attribution principles into domestic law aligned with OECD and UN norms.
• Avoiding retrospective amendments.
• Expanding dispute resolution, including mandatory arbitration for unresolved cross-border cases.
• Training tax officers to apply rules consistently, especially for digital businesses.
The Stakes
The proposal comes as global tax rules evolve under the OECD/G20’s BEPS framework, which seeks to reallocate taxing rights to market jurisdictions and impose a 15% global minimum tax. India has been a vocal proponent of giving host countries more taxing power, particularly in the digital economy.
For policymakers, the presumptive regime is a pragmatic compromise: it guarantees predictable revenue for the government and certainty for investors. For foreign companies, it offers a way to avoid years of litigation – even if effective tax rates rise in some sectors.
“India is trading flexibility for certainty,” said one tax expert. “The real question is whether multinationals will take the deal.”
