Direct Tax Alert
Key Amendments Proposed in the Taxation and Other Laws (Amendment) Bill, 2026
BACKGROUND
The Income-tax Act, 2025 (ITA 2025) came into force on 1 April 2026, consolidating and replacing the Income-tax Act, 1961. Thereafter, the President laid the Income-tax (Amendment) Ordinance, 2026 on 5 June 2026. As mandated under Article 123(2) of the Constitution, to replace this Ordinance with an Act of Parliament, the Government has now introduced the Taxation and Other Laws (Amendment) Bill, 2026 (the Bill) in the Lok Sabha. Besides re-enacting the Ordinance, the Bill carries certain additional amendments to the ITA 2025 and the Finance Act, 2026 with a view to promoting ease of doing business and providing tax certainty. The Central Board of Direct Taxes (CBDT) has released Frequently Asked Questions explaining the amendment, the rationale for such amendment and its impact.
We, at BDO India, have summarised the key direct tax proposals in the Bill and provided our comments on its impact hereunder:
It is proposed to simplify the framework by reducing the compliance conditions from 13 at present to only 5 conditions, retaining only core safeguards with the objective of promoting fund management activity in India and providing tax certainty. This is intended to enable fund managers to relocate to India without the offshore fund being treated as having a business connection here. The said amendment shall be effective from 1 April 2026.
2. Tax exemption for electronic goods manufacturing
The bill proposes to extend the tax exemption available to foreign companies supplying capital goods, equipment or tooling to Indian contract manufacturers of specified electronic goods for another period of 10 years. The exemption would be restricted to supply to Indian contract manufacturers producing specified electronic goods. The definition of the expression ‘specified electronic goods’ has also been inserted, which includes products such as mobile phones, computers, laptops, tablets, servers, hearables, wearables and related accessories.
3. Conditions for data centre exemption relaxed
Currently, exemption is available to foreign companies up to tax year 2046-47 on income arising from procuring data centre services from a specified data centre in India with the condition that all sales are made through a reseller Indian company and the foreign company shall not own or operate any infrastructure. The specified data centre must be set up under an approved scheme and must be owned or operated by an Indian Company. The exemption is subject to conditions, including notification of both the foreign company and the specified data centre by the Central Government. The Bill proposes removal of the notification condition and clarifies that the exemption would also be available in case of an Indian company operating a specified data centre on a lease model of ownership, subject to such conditions as may be prescribed.
4. Dividend exemption for unit holders of business trusts regardless of tax regime opted by special purpose vehicle
Currently, dividend distributed by a special purpose vehicle (SPV) to a business trust and passed on to unit holders is exempt in the hands of the unit holder only where the SPV is taxed under the old regime. The Bill omits this restriction and allows the unit holders to enjoy exemption on dividend income even where the SPV is taxed under the new regime. Consequently, to compensate for the revenue loss on account of providing such exemption, it is proposed to levy an additional 15% surcharge (taking the effective surcharge to 25%) on a domestic company that is an SPV of a business trust operating under the new tax regime.
5. Exemption for interest and capital gains on Government securities
The Bill provides exemption on interest income and capital gains arising on sale, exchange or transfer of Government securities held by a Foreign Institutional Investor and by the Bank for International Settlements, subject to furnishing of prescribed information.
6. New exemption for foreign companies dealing in rough diamonds
Exemption has been proposed for income on sale of rough diamonds earned by a foreign mining company engaged in the business of selling rough diamonds, or functioning as a sightholder, broker, aggregator, or a tender and auction entity connected with sale of rough diamonds, provided the sale is carried out through a Special Notified Zone and the foreign company has furnished prescribed information. The exemption will be available for a period of 15 years, i.e. up to the tax year ending on 31 March 2041.
7. New exemption for foreign companies storing components for contract manufacturers
The bill proposes to exempt income arising on account of storage of components of a foreign company in a customs-bonded warehouse for an Indian contract manufacturer producing specified electronic goods on behalf of a foreign company, subject to furnishing prescribed information. The exemption shall be available on sale of components by such foreign company. The exemption will be available for a period of 15 years, i.e. up to the tax year ending on 31 March 2041.
BDO India Comments:
The proposed amendments align with the objective of promoting ease of doing business and providing tax certainty. The proposals relating to relaxation of conditions governing eligible offshore investment funds and eligible fund managers, removal of the condition relating to notification of a foreign company as well as a data centre, and clarity on eligibility of lease model ownership of data centres for claiming exemption are welcome steps. The extension of exemption tenure relating to electronic goods manufacturing and new exemptions relating to the sale of rough diamonds and contract manufacturing should provide long-term certainty to the business.
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