India’s 2026 Tax Reset: What Foreign Companies Operating in India Must Prepare For
Major reforms in corporate taxation, transfer pricing, and treaty rules—combined with progress on EU–India, India–US, and EFTA trade partnerships—are reshaping the regulatory and compliance landscape for foreign companies operating in India.
A New Phase in India’s Tax and Regulatory Framework
India is entering a decisive phase in the modernization of its tax environment. With the introduction of the new Income-tax Act, 2025, structural changes in transfer pricing rules, and preparations for the global minimum tax regime under OECD Pillar Two, the country is redefining how multinational companies structure their operations.
At the same time, India’s economic integration with global markets is accelerating. Negotiations around the EU–India Free Trade Agreement and discussions surrounding a potential India–United States Trade Agreement are expected to reshape trade flows.
Another key development is the India–EFTA Trade and Economic Partnership Agreement, strengthening business engagement between India and EFTA members including Norway, Switzerland, Iceland, and Liechtenstein.
For foreign companies engaged in trading, distribution, sourcing, or subsidiary operations in India, these developments create opportunities but also increase the need for stronger compliance, financial structuring, and cross-border tax planning.
Structural Reform: Transition to the Income-tax Act, 2025
(Relevant primarily for companies with subsidiaries in India)
The Union Budget 2026-27 introduced a landmark transition to the Income-tax Act, 2025, which will replace the existing Income-tax Act of 1961 starting 1 April 2026.
This reform focuses on simplification, modernization, and procedural clarity, particularly relevant for foreign-owned subsidiaries operating in India.
Key Corporate Provisions
Reduction in Minimum Alternate Tax (MAT)
Minimum Alternate Tax ensures that companies reporting high accounting profits still pay a minimum tax even if deductions reduce their taxable income. The MAT rate is proposed to decrease from 15% to 14%.
MAT Credit Rationalization
Companies opting for concessional corporate tax regimes will be able to use accumulated MAT credits, though the credit set-off will be limited to 25% of the annual tax liability.
Buyback Taxation Reform
Share buybacks will now be taxed as capital gains in the hands of shareholders, instead of through a company-level buyback tax.
International Supply Chain Incentives
A five-year tax holiday is proposed for non-resident entities supplying capital goods or manufacturing tools to toll manufacturers in bonded manufacturing facilities.
This measure could indirectly benefit trading companies involved in equipment supply chains into India.
Draft Income Tax Rules 2026: Simplification and Digital Navigation
(Relevant for subsidiaries and cross-border traders)
To support the new tax framework, the Central Board of Direct Taxes released the Draft Income Tax Rules, 2026.
Key structural improvements include:
- Reduction of total tax rules from 511 to 333
- Reduction of forms from 399 to 190
- Introduction of a digital Navigator tool mapping provisions between the old and new tax frameworks
- Updated definitions of Significant Economic Presence (SEP)—a rule that allows India to tax digital businesses generating economic value in India without physical presence
SEP provisions are particularly relevant for foreign companies trading digitally with Indian customers without a local entity.
Judicial Developments Impacting Cross-Border Businesses
Recent rulings have clarified several international tax issues affecting multinational companies.
Foreign Tax Credit (FTC) Relief
(Relevant for subsidiaries remitting profits or managing cross-border tax credits)
In Real Time Data Services v. PCIT, the Delhi High Court ruled that delays in filing Form 67 should not automatically invalidate Foreign Tax Credit (FTC) claims.
Foreign Tax Credit allows companies to offset taxes paid abroad against Indian tax liabilities.
SaaS Payments and Treaty Interpretation
(Highly relevant for companies providing digital services or licensing software into India)
In Beeline Com LLC v. ITO, the Delhi High Court ruled that payments for Software-as-a-Service (SaaS) platforms do not automatically qualify as Fees for Technical Services (FTS) or royalties under the India–US tax treaty.
This is a significant development for technology companies providing cloud-based services to Indian customers or subsidiaries.
Transfer Pricing Reset Under Union Budget 2026
(Relevant mainly for companies with Indian subsidiaries)
Transfer pricing rules govern transactions between companies belonging to the same multinational group.
India has introduced several reforms to improve predictability.
Expanded Safe Harbour Threshold
The eligibility threshold for Safe Harbour Rules has increased from INR 300 crore to INR 2,000 crore, allowing more multinational subsidiaries to benefit from simplified compliance.
Unified IT Services Category
Previously separate categories for:
- Software development services
- IT-enabled services
- Knowledge process outsourcing
have now been consolidated into a single Information Technology Services category.
Data Centre Incentives
A 15% safe harbour margin has been introduced for Indian entities providing data centre services to overseas Associated Enterprises (AEs).
Faster Advance Pricing Agreements
The government has introduced a fast-track process for unilateral Advance Pricing Agreements (APAs).
APAs provide companies with advance clarity on acceptable transfer pricing methodologies.
AI-Driven Monitoring of Transfer Pricing Risks
(Relevant for subsidiaries)
India’s tax authorities have implemented an Artificial Intelligence-based risk assessment system within the Income Tax Department’s Insight platform.
The system analyses:
- Form 3CEB filings reporting international related-party transactions
- Country-by-Country Reporting (CbCR) data submitted by multinational groups
- Financial data obtained through international information exchange frameworks
The AI system helps identify potential tax risks such as:
- Low-profit subsidiaries
- Large intra-group service payments
- Inconsistent financial reporting across jurisdictions
Indirect Tax Compliance: GST Obligations
(Relevant mainly for companies trading goods or services in India)
Foreign subsidiaries and companies trading goods or services in India must comply with Goods and Services Tax (GST) regulations.
Typical monthly compliance requirements include:
- GSTR-1 – reporting outward supplies
- GSTR-3B – monthly summary return and tax payment
- GSTR-7 – return for entities deducting Tax Deducted at Source (TDS)
- GSTR-8 – return for e-commerce platforms collecting Tax Collected at Source (TCS)
Maintaining proper GST compliance is particularly important for trading and distribution companies importing or selling goods in India.
Labour Law and Corporate Regulatory Filings
(Relevant for companies with Indian subsidiaries)
Foreign-owned companies must also manage regulatory filings outside tax compliance.
Important filings include:
- Form ECB-2, submitted to the Reserve Bank of India for External Commercial Borrowings (ECB)—loans raised by Indian companies from overseas lenders
- Quarterly disclosures by listed companies under the Securities and Exchange Board of India’s Listing Obligations and Disclosure Requirements (LODR) Regulations
International Tax Treaties and Anti-Avoidance Rules
(Relevant for both subsidiaries and trading companies)
India continues to strengthen its bilateral tax treaties to align with global anti-avoidance standards.
India and France recently signed an amendment to the India–France Double Taxation Avoidance Agreement.
Key changes include:
- Dividend taxation rates of 5% and 15%
- Removal of the Most-Favoured-Nation clause
- Updated capital gains taxation rules
- Introduction of the Principal Purpose Test (PPT) to prevent treaty abuse
These developments highlight India’s increasing focus on substance-based taxation.
Global Minimum Tax and India’s Pillar Two Readiness
(Relevant mainly for large multinational groups with subsidiaries)
India is preparing to implement the 15% global minimum corporate tax under the OECD Pillar Two framework for multinational groups with global revenues exceeding EUR 750 million.
The new framework introduces simplified Effective Tax Rate safe harbour rules and transitional relief under Country-by-Country Reporting (CbCR).
India is also expected to introduce a Qualified Domestic Minimum Top-up Tax, which will require multinational companies to align global tax reporting structures.
Strategic Market Entry and Expansion
As India’s tax and regulatory framework evolves alongside major trade developments such as the EU–India Free Trade Agreement, the potential India–United States Trade Agreement, and the India–EFTA Trade and Economic Partnership Agreement, foreign companies must ensure their investment structures and tax strategies remain aligned with India’s evolving compliance landscape.
M+V Altios supports international companies with market entry strategy, financial management advisory, investment structuring, and tax management, helping businesses build compliant and sustainable operations in India since 2000.
