On 1 April 2026, India replaced its six-decade-old Income-tax Act, 1961 with the Income-tax Act, 2025, marking the first complete overhaul of the country’s direct tax legislation since independence. Union Budget 2026-27 simultaneously introduced a targeted incentive package for foreign manufacturers, technology companies, and global service providers. For multinational companies with Indian subsidiaries, branch offices, or cross-border supply chains, FY 2026-27 is a year of structural adjustment.
The Income-tax Act, 2025: What Changes for Foreign-Owned Subsidiaries
The new Income Tax Act reorganises 819 sections into 536 across 23 chapters. Tax rates and core policy remain largely intact. The changes that matter for foreign-owned subsidiaries are procedural and structural.
Tax Year Concept
The dual “previous year” and “assessment year” system has been replaced with a single “tax year.” FY 2026-27 is now Tax Year 2026-27. While primarily a nomenclature change, it affects how filing deadlines, advance tax instalments, and withholding certificates are referenced. Finance teams at Indian subsidiaries should update internal templates and reporting calendars.
MAT: From Deferral Mechanism to Final Tax
Minimum Alternate Tax will no longer accumulate as a credit from 1 April 2026. The rate drops from 15% to 14%, but the structural shift matters more: MAT is now a final tax. Existing credit balances accumulated until 31 March 2026 remain available, though set-off is capped at 25% of annual tax liability per year. Subsidiaries carrying large MAT credit balances need to model the carry-forward impact over the next four to five years.
Buyback Taxation: Back to Capital Gains
Share buyback taxation has undergone three regime changes in rapid succession. Until September 2024, companies paid a buyback distribution tax. From October 2024 through March 2026, proceeds were taxed as deemed dividends in the shareholder’s hands at slab rates. From April 2026, buybacks revert to capital gains treatment at 12.5% (long-term) and 20% (short-term), with the cost of acquisition now deductible.
The critical detail for foreign parent companies: Budget 2026 introduces a Special Additional Tax on promoters, making the effective rate approximately 22% for corporate promoters and 30% for non-corporate promoters. Any foreign parent holding a majority stake and considering a buyback as a capital return mechanism must factor in this differential.
Simplified Rules and Forms
The Income-tax Rules, 2026 reduce total rules from 511 to 333 and forms from 399 to 190. CBDT has introduced a digital Navigator tool mapping provisions between the old and new frameworks. The transition period will require parallel referencing for assessments relating to earlier years.
Budget 2026: Incentives for Foreign Companies
Budget 2026-27 contains some of the most targeted fiscal incentives for non-resident businesses in recent memory. Four measures are directly relevant for companies structuring operations in India:
Tax Holiday for Capital Goods Suppliers in Bonded Zones
Non-resident entities supplying capital goods, equipment, or tooling to toll manufacturers in customs-bonded facilities will receive a five-year income tax exemption (through Tax Year 2030-31). Foreign ownership of production equipment deployed in India, combined with technical involvement in manufacturing, has historically triggered permanent establishment concerns. By legislatively exempting this income, the government is supporting offshore ownership models in contract manufacturing. Companies operating toll or contract manufacturing arrangements should reassess their equipment supply structures in light of this carve-out.
Data Centre Tax Holiday Until 2047
Foreign companies providing global cloud services through Indian data centres will be eligible for a tax holiday extending until 2047, one of the longest concession windows in Indian fiscal history. Services to Indian customers must be routed through a local reseller entity. For related-party structures, a safe harbour margin of 15% on cost applies. This positions India directly against competing jurisdictions in Southeast Asia and the Middle East for cloud infrastructure investment.
Component Warehousing: 2% Safe Harbour
Non-resident entities warehousing components in customs-bonded facilities for sale to contract manufacturers in electronics will be taxed on a deemed profit margin of 2% of invoice value, resulting in an effective tax rate of approximately 0.7%. This creates a low-risk framework for inventory staging and just-in-time logistics, making India significantly more competitive for component supply chain operations.
Non-Resident Expert Exemption
A five-year exemption on global (non-India-sourced) income is proposed for non-resident individuals visiting India under government-notified schemes, provided they have been non-resident for the preceding five years. India-sourced income remains taxable. While targeted at semiconductor and AI specialists, the provision applies broadly. Companies sending technical personnel for commissioning, training, or technology transfer should evaluate whether their deployments qualify.
Transfer Pricing: Safe Harbour and APA Overhaul
Expanded Safe Harbour Threshold
The eligibility threshold for safe harbour rules has increased from INR 300 crore to INR 2,000 crore (approximately EUR 220 million). The previous threshold excluded most mid-sized foreign subsidiaries. At the revised level, a significantly larger pool of foreign-owned entities can opt for simplified compliance with pre-approved margins, reducing the risk of prolonged transfer pricing assessments.
Unified IT Services Category
Software development, IT-enabled services, knowledge process outsourcing, and contract R&D have been consolidated into a single “Information Technology Services” category with a uniform safe harbour margin of 15.5%. This eliminates classification disputes common during assessments, particularly for captive centres performing a mix of development and support functions.
Fast-Track APAs and AI-Driven Risk Profiling
Unilateral APAs for IT services will follow a fast-track process with a two-year finalisation timeline (extendable by six months). Associated enterprises can now file modified returns to claim refunds of excess taxes paid during the negotiation period. Separately, India’s tax authorities have deployed an AI-based risk assessment system within the Insight platform, analysing Form 3CEB filings, Country-by-Country Reporting data, and international exchange information to flag risks such as low-margin subsidiaries and large intra-group service payments. Transfer pricing documentation quality now directly influences audit selection probability.
Treaty Developments and Cross-Border Taxation
India-France DTAA: A Signal of Treaty Direction
The Protocol amending the India-France DTAA signals where India’s broader treaty policy is heading. Dividend withholding tax is set at 5% for qualifying direct investment shareholdings and 15% as the general rate. The Most-Favoured-Nation clause has been removed, a direct response to the Supreme Court’s rulings in the Nestle and Steria cases, which had compelled India to extend lower rates based on MFN obligations. The Principal Purpose Test has been introduced to prevent treaty shopping. For companies operating under other Indian DTAAs, the direction is clear: India is moving toward substance-based treaty access, and benefits will depend on demonstrating genuine economic activity in India.
Significant Economic Presence: The Treaty Override
SEP provisions, with thresholds notified since 2021, technically allow India to tax non-residents generating digital economic value without a physical presence. However, no Indian DTAA currently includes SEP within its permanent establishment definition. For companies from treaty jurisdictions, the practical impact remains limited as long as valid treaty access is maintained. A useful refinement from Budget 2025 (effective April 2026): transactions confined to the purchase of goods in India for export are now explicitly excluded from constituting SEP, directly protecting sourcing operations.
Trade Architecture: What’s Shifting
India’s tax reforms are unfolding alongside a landmark reconfiguration of its trade relationships. The EU-India Free Trade Agreement, concluded on 27 January 2026 after nearly two decades of negotiations, is the largest trade pact either side has signed. The agreement eliminates or reduces tariffs on over 90% of goods traded between the two economies, covering automotive, machinery, chemicals, pharmaceuticals, textiles, and agri-food. India has agreed to reduce automotive tariffs from as high as 110% to 10% over five years, while the EU grants immediate zero-duty access for Indian textiles, leather, and gems. For foreign companies operating in or entering India, the FTA reshapes customs duty economics across key industrial sectors and introduces new investment protection provisions.
The India-EFTA Trade and Economic Partnership Agreement (TEPA), signed in 2024, commits India to facilitating investment from Switzerland, Norway, Iceland, and Liechtenstein. Discussions around an India-United States trade framework are also advancing following the February 2026 agreement to address reciprocal tariffs, though a comprehensive deal remains some distance away. Together, these developments are redefining the strategic calculus for companies deciding where to locate in India, how to structure supply chains, and which trade protections to build into their market entry frameworks.
Navigating the Reset
FY 2026-27 is not a year of incremental adjustments. A new tax statute, restructured transfer pricing rules, evolving treaty positions, and targeted incentives for foreign manufacturers and service providers collectively demand that multinational companies reassess their India structures, from entity design and transfer pricing policy to equipment ownership models and personnel deployment.
M+V Altios has supported international companies with India market entry, investment structuring, financial management, and tax structuring since 2000. If your organisation is navigating any of the developments outlined above, our team can help assess the implications for your specific structure and operating model.
