Presumptive tax will override other taxes for foreign service providers in electronics manufacturing

The move is expected to make India a more attractive destination for global technology firms

The Finance BIll 2025, passed in the Lok Sabha on Tuesday, has introduced an amendment to the taxation framework for non-resident/foreign service providers in electronics manufacturing, making available the presumptive taxation scheme to the sector. The amendment which establishes that the presumptive taxation scheme will override other applicable tax provisions., is expected to benefit companies like Taiwan's Delta Electronics and NXP Semiconductors.

This move has provided greater clarity and certainty for foreign firms operating in the sector. The move is expected to reduce litigation risks and enhance the ease of doing business in the country’s electronics manufacturing ecosystem, experts said.

By eliminating ambiguity, reducing compliance burdens, and ensuring a lower, predictable tax rate, the move is expected to make India a more attractive destination for global technology firms looking to support the country’s electronics manufacturing ambitions, they said.

Samir Kanabar, Tax Partner, EY India, told Moneycontrol, “The amendment will put to rest confusion over whether foreign technology service providers should be taxed at a higher (effective) tax rate on a net income basis (as a permanent establishment) or on a gross basis (as royalty). It’s a welcome change and will go a long way in reducing litigation as well as improving ease of doing business.”

Hemal Shah, Associate Partner at Economic Laws Practice, added, “The Finance Bill 2025 has provided much-needed clarity by explicitly excluding income taxed under Section 44BBD. This removes the risk of tax authorities asserting a higher tax rate and ensures certainty for foreign service providers."

Presumptive taxation is a simplified tax scheme where the government assumes a certain percentage of a business’s income as taxable, instead of requiring detailed accounting records. This approach is particularly beneficial for small businesses and non-resident entities as it reduces compliance burdens and prevents tax disputes. Under the new amendment, non-resident entities providing services or technology to Indian companies engaged in setting up electronics manufacturing facilities will be taxed on a deemed profit basis rather than facing complex tax calculations.

Under this provision, 25 percent of the gross receipts will be considered as taxable business profit in India, leading to an effective tax rate of 9.56 percent on a gross basis for foreign companies, Abhishek Mundada, Partner, tax advisory Dhruva Advisors, told Moneycontrol.

However, prior to the latest amendment, there was ambiguity over whether such income could also be classified as royalty or fees for technical services (FTS) which attract higher tax rates. The amendment explicitly ensures that foreign companies are not subject to higher tax rates under other sections of the Income Tax Act. This provides much-needed relief to foreign service providers, eliminating the risk of tax authorities demanding higher tax under conflicting provisions.

"The latest amendment ensures that such income is ring-fenced, simplifying compliance and eliminating the need to maintain audited books of accounts in India. However, unlike some other presumptive schemes, Section 44BBD does not allow taxpayers to declare lower profits than the presumptive rate, even if they maintain proper accounts. While this provides clarity, it is something that could be reconsidered.” Mundada explained.