How Presumptive Taxation Can Transform India's Investment Climate

Certainty is the cornerstone of progress. In the ever-evolving landscape of international taxation, certainty is not only desirable but also indispensable. The recent Working Paper by NITI Aayog’s Consultative Group on Tax Policy aims to infuse confidence in the foreign entities having Permanent Establishment in India, by advocating a standardised, sector-specific presumptive taxation regime. This proposal can be a game-changer for India’s investment climate. Permanent establishment is typically an international tax concept. It signifies that a foreign enterprise has a significant and ongoing presence in the other country through which it carries on business activities in the host country.​ It creates a taxable nexus, allowing the source country to tax profits attributable to that presence.

Tax uncertainty in foreign company taxation sphere not only impacts individual businesses but also deters Foreign Direct Investment, and Foreign Portfolio Investment , thereby affecting macroeconomic stability. It has long troubled foreign companies in India, with several high-profile cases taking years to reach final resolution. Landmark disputes such as Motorola Inc. (telecom, about 7 years), Rolls Royce (aerospace/defence, about 9 years), SET Satellite (media, about 8 years), E-Funds (IT/BPO, over 10 years), and Hyatt International (hospitality, over 12 years) illustrate the prolonged timelines faced by multinationals. Even cases considered "quick resolutions," like Morgan Stanley (financial services, 4 years) and Formula One (sports, 5 years), underline the systemic delays. This enduring pattern of litigation highlights the pressing need for certainty, predictability, and timely closure in the taxation of foreign enterprises operating in India.

Though no data exists on the volume of business or investment lost, it can be intuitively stated that this worry certainly weighs potential investors in establishing Permanent Establishment in India. As the paper rightly discusses that uncertainties arise primarily from attributing the amount of profit out of the company's total profits, as a fair share taxable in the country where its permanent establishment operates.  Here, the taxman, acting as both judge and interested party, often determines how much profit must be attributed to India—an arrangement fraught with the potential for disputes and litigation.

Consider the landmark Supreme Court judgment in DIT (International Taxation) v. Morgan Stanley & Co. Inc., where the attribution of profits to a permanent establishment  became a central issue. The court laid down that if arm’s length remuneration is paid to the Indian entity, no further profits need to be attributed. Yet, in practice, such clarity is seldom achieved, leaving businesses in a limbo of endless negotiations and uncertainties.

The core recommendation of the Niti Ayog Working Paper is an Optional Presumptive Taxation Scheme for foreign companies, with industry-calibrated profit rates applied to India-sourced gross receipts. This, the paper claims, “pre-empts permanent establishment and profit attribution disputes—offering certainty, simplified compliance, and a predictable tax share for India without audits or litigation.”

This approach is not without precedent. Sections 44AD, 44ADA, and 44AE of the Income-tax Act already offer similar relief to small businesses, professionals, and transport operators, exempting them from exhaustive record-keeping and audits. The Working Paper’s suggestion to extend this regime to foreign entities—especially in complex sectors like infrastructure, digital services, and engineering—signals a matured understanding of global business realities.

The proposed presumptive rates are thoughtfully calibrated to reflect industry economics—ranging from 5% to 30%—with 10% for infrastructure and engineering services (aligned to sections 44BBB/44BB), 5%–20% for technology equipment supply and installation, 20% for consultancy and software services, 15% for marketing support, and 30% for digital/e-commerce revenues from Indian users to ensure fair taxation of the digital economy. The e-commerce rate could further be benchmarked to effective margins reported by platforms like Amazon or Google based on government-available financial or disclosure data, ensuring alignment with actual market outcomes. Importantly, only a fair and reasonable rate reflecting genuine profitability levels will be acceptable to the industry.

Once opted in, foreign companies would pay taxes on India-sourced receipts at fixed rates, skipping permanent establishment  checks, audits, and the dreaded disputes. Companies can still opt out if they believe their actual profits are lower and file audited returns, preserving flexibility. The paper advocates options and voluntary adoption. Therein lies its beauty. The scheme once implemented would cut litigation, boost FDI/FPI, and foster predictable outcomes, making India a sought-after investment destination.

The Ministry of Finance must quickly review these recommendations, constitute a dedicated drafting group, engage stakeholders, and integrate the provisions into the upcoming Income tax Act, 2025 or Finance Bill. Building on the existing presumptive taxation framework, this initiative could be pivotal in signalling India’s commitment to tax certainty and investor confidence.

Optional Presumptive Taxation Scheme is much more than a technical tweak—it is a statement of intent. By providing certainty, simplicity, and choice, India stands to gain not only higher investment flows but also a reputation as a fair and predictable tax jurisdiction. As the global economy becomes increasingly interconnected, the time for such pragmatic reforms is now.