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Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

Contents 1.

Introduction

Overview of the amendments proposed in TOLA 2026:

Relaxation of eligibility conditions for eligible investment funds [Schedule I of the ITA 2025/Section 9A of ITA 1961]

Extension of exemption period provided to a foreign company providing capital goods, equipment or tooling equipment to a contract manufacturer [Schedule IV (Table Sl. No. 13A)]

Amendment of conditions for providing exemption to foreign company procuring data centre services from a specified data centre [Schedule IV (Table Sl. No. 13C)]

Exemption of interest on government securities (G-Sec) and capital gains arising from the sale, exchange or transfer of such securities to FIIs or the BIS [Schedule IV (Table Sl. No. 13D and 13E)]

Income arising from the sale of rough diamonds will be exempt from tax [Schedule IV: Table, Sl. No. 13F]

Income arising to a foreign company on account of storage components in a warehouse in a customs-bonded area will be exempt from tax [Schedule IV: Table, Sl. No. 13G]

Exemption to unit holders of business trust for dividend received from SPV and consequential impact thereof on taxability of SPV [Schedule V: Table, Sl. No. 5]

Introduction

The Govt. has tabled the Taxation and Other Laws (Amendment) Bill, 2026 [hereinafter referred to as the ‘TOLA, 2026’] in the Lok Sabha on August 04, 2026, to replace the Income-tax (Amendment) Ordinance, 2026 and to introduce additional amendments to the Income-tax Act, 2025, the Finance Act, 2026 and the Payment and Settlement Systems Act, 2007. As per the ‘Statement of Objects and Reasons’ of TOLA 2026, the Ordinance was promulgated to address economic uncertainty arising from global geopolitical developments and supply chain disruptions by introducing urgent taxation measures to support economic stability and affected sectors. While the Ordinance provided tax relief to Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS), the TOLA 2026 proposes additional amendments to extend further tax incentives, enhance tax certainty, and improve the ease of doing business, considering subsequent policy assessments and stakeholder representations. Some of the significant amendments proposed by the TOLA 2026 include the extension of the tax exemption available to foreign companies for the income arising from the sale of components to a contract manufacturer of specified electronic goods, relaxation of conditions governing exemptions relating to procurement of data centre services, and insertion of new exemptions for income from the sale of rough diamonds and exemption for dividend earned by the unitholder from the SPV opting for the alternate tax regime. Collectively, these measures reflect the Government’s attempt to strengthen India’s attractiveness as an investment destination while simultaneously reducing tax-related uncertainties in sectors having significant cross-border participation.

Overview of the amendments proposed in TOLA 2026:

The following are the amendments proposed in the TOLA 2026: (a) Schedule I of the ITA 2025 has been substituted to extend the relaxation in conditions for eligible investment funds [see Para 3]. (b) Entry 13A in Schedule IV has been amended to extend the exemption period available to a foreign company providing capital goods, equipment or tooling equipment to a contract manufacturer [see Para 4]. (c) Entry 13C in Schedule IV has been amended to substitute the meaning of ‘specified data centre’ [see Para 5]. (d) Entry 13D and Entry 13E have been inserted in Schedule IV to provide the exemption from interest on government securities (G-Sec) and capital gains arising from the sale, exchange or transfer of such securities to FIIs or the BIS [see Para 6]. (e) The new Entry 13F has been inserted in the Table of Schedule IV to provide an exemption for the income arising to a foreign company from the sale of rough diamonds [see Para 7].

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

(f)

The new Entry 13G has been inserted in the Table of Schedule IV to provide an exemption for the income arising to a foreign company on account of the sale of components to a contract manufacturer for specified electronic goods in India [see Para 8].

(g) Schedule V: Table, Sl. No. 5 has been amended to extend exemption to unit holders of business trust for dividend received from SPV opting for the alternate tax regime [see Para 9]. (h) Section 3(4) of the Finance Act 2026 has been amended to increase the rate of surcharge applicable to an SPV opting for the alternate tax regime [see Para 9.2-2.].

Relaxation of eligibility conditions for eligible investment funds [Schedule I of the ITA 2025/ Section 9A of ITA 1961]

3.1. Pre-amendment provision Section 9 of the ITA 2025 deals with cases of income that are deemed to accrue or arise in India. Section 9(1) creates a legal fiction that certain incomes shall be deemed to accrue or arise in India. Section 9(2) provides a set of circumstances in which income accruing or arising, directly or indirectly, is deemed to accrue or arise in India, inter alia, income accruing or arising through or from any business connection in India. Once a business connection is established, the income attributable to the activities constituting that business connection becomes taxable in India. Section 9(12) of the ITA 2025 provides that an eligible investment fund shall not be regarded as having a business connection in India merely because its fund management activities are carried out through an eligible fund manager located in India. The eligible investment fund means a fund established, incorporated or registered outside India, which collects funds from its members for investing them for their benefit and fulfils conditions prescribed in Schedule I. The Schedule lays down various eligibility conditions applicable to the investment fund, the fund manager and the reporting obligations. Currently, it provides 13 conditions for the eligible investment fund and 4 conditions for the fund manager.

3.2. Post-amendment provision Schedule I of the ITA 2025 is proposed to be amended by TOLA 2026, with effect from 01-04-2026, to relax the conditions for qualifying as an eligible investment fund. It is proposed to reduce the number of eligibility conditions from the existing 13 to only 5, with a view to rationalising the eligibility criteria. The 4 conditions prescribed for the fund manager continue without any modification.

3.2-1. Five conditions prescribed for investment fund The five conditions for qualifying as an eligible investment fund are as follows:

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

3.2-1a. Investment fund is a non-resident in India An offshore fund shall be deemed as an eligible investment fund provided it is not a person resident in India in accordance with the provisions of Section 6. There is no change in this condition.

3.2-1b. Investment fund is a resident of specified foreign countries An offshore fund shall be deemed an eligible investment fund provided it is: ▶

A resident of a country or a specified territory with which a double taxation avoidance agreement (DTAA) or Tax Information Exchange Agreement (TIEA) has been entered into; or

▶

Established, incorporated or registered in a country or a specified territory notified by the Central Government in this behalf. There is no change in this condition.

3.2-1c. Ceiling on investment by a person resident in India An offshore fund shall be deemed an eligible investment fund if the aggregate direct participation or investment in the fund by persons resident in India does not exceed 5% of the corpus of the fund. For the calculation of the aggregate participation or investment in the fund, any contribution up to Rs. 25 crores made by the eligible fund manager during the first three years of operation of the fund shall not be considered. This condition in the pre-amended provision provided for excluding the initial contribution ‘not exceeding Rs. 25 crores’, which is now changed to ‘up to Rs. 25 crores.’ This 5% threshold is evaluated twice a year, as of 1st April and 1st October of the tax year. If the 5% threshold condition is not met on specified dates, it will still be deemed satisfied if fulfilled within 4 months of the respective date. There is no change in this condition. 3.2-1d. Restrictions on other business activities in India An offshore fund shall be deemed an eligible investment fund provided the fund fulfils the following two conditions: ▶

Does not carry on or control and manage, directly or indirectly, any business in India,

▶

No person acting on behalf of the fund engages in any activity which constitutes a business connection in India other than activities undertaken by the eligible fund manager on its behalf.

3.2-2. Removal of existing 8 conditions The following 8 conditions that were required to be satisfied for an offshore fund to qualify as an eligible investment fund are proposed to be removed:

3.2-2a. Fund should be subject to the Investor Protection Regulation An offshore fund was required to be subject to the applicable investor protection regulations in the country or specified territory where it was established, incorporated or is a resident.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

3.2-2b. Minimum number of members Currently, an offshore fund shall be deemed an eligible investment fund provided that the fund has at least 25 members who are not connected persons, directly or indirectly. This condition is proposed to be omitted. Accordingly, there is no longer any minimum requirement regarding the number of investors in the fund.

3.2-2c. Restriction on participation interest of a single investor An offshore fund shall be deemed an eligible investment fund if any member of the fund, along with connected persons, does not have any participation interest, directly or indirectly, in the fund exceeding 10%. This condition is proposed to be omitted.

3.2-2d. Restriction on concentration of participation interest An offshore fund shall be deemed an eligible investment fund if the aggregate participation interest, directly or indirectly, of ten or fewer members along with their connected persons in the fund shall be less than 50%. This condition is proposed to be omitted.

3.2-2e. Ceiling on investment in a single entity An offshore fund shall be deemed an eligible investment fund if the fund’s investment in an entity does not exceed 25% of the fund’s corpus. This condition is proposed to be omitted.

3.2-2f. Restriction on investment in associate entities An offshore fund shall be deemed an eligible investment fund if the fund does not make any investment in its associate entity. This condition is proposed to be omitted.

3.2-2g. Minimum corpus requirement An offshore fund shall be deemed an eligible investment fund provided the monthly average of the corpus of the fund is not less than Rs. 100 crores. If the fund has been established or incorporated in the tax year, the corpus of the fund shall not be less than Rs. 100 crores at the end of a period of 12 months from the last day of the month of its establishment or incorporation. This condition does not apply to a fund that has been wound up in the tax year. This condition is proposed to be omitted.

3.2-2h. Minimum remuneration payable to the eligible fund manager An offshore fund shall be deemed as an eligible investment fund provided the remuneration paid by the fund to an eligible fund manager in respect of fund management activity undertaken on its behalf is not less than the amount calculated in the manner prescribed in Rule 274(4). This condition is proposed to be omitted.

3.2-3. Withdrawal of the Government’s power to relax Schedule I conditions TOLA 2026 has proposed to omit the existing paragraph 6 of Schedule I. Paragraph 6 empowered the Central Government to relax, by way of notification, one or more conditions applicable to an eligible investment fund or its eligible fund manager where the fund

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

manager was located in an International Financial Services Centre (IFSC) and had commenced operations on or before 31 March 2030. The omission of this provision is consequential to the comprehensive relaxation of conditions specified in Schedule I. The proposed amendments to Schedule I simplify the eligibility framework for eligible investment funds by reducing the number of qualifying conditions from thirteen to five. In view of this simplified statutory framework, the need for a separate enabling provision authorising the Central Government to exempt or modify these conditions for a specified category of eligible fund managers no longer remains.

4. Extension of exemption period provided to a foreign company providing capital goods, equipment or tooling equipment to a contract manufacturer [Schedule IV (Table Sl. No. 13A)] 4.1. Pre-amendment provision Entry 13A in Schedule IV of the ITA 2025 contains the following provisions: (a) The exemption shall apply to a foreign company with effect from the tax year 202627; (b) The exemption will be available for any income arising from providing capital goods, equipment, or tooling (hereinafter referred to as ‘Assets or Apparatus’) to a contract manufacturer; (c) The contract manufacturer is a company resident in India; (d) The exemption applies to a foreign company providing assets or apparatus to the contract manufacturer for use in electronic manufacturing in India; (e) The ownership of such assets or apparatus remains with the foreign company; (f)

Such assets or apparatus are under the control and direction of the contract manufacturer;

(g) The contract manufacturer is located in a customs-bonded area, that is, a warehouse referred to in Section 65 of the Customs Act, 1962 (52 of 1962); (h) The contract manufacturer produces electronic goods on behalf of the foreign company for a consideration; (i)

Such exemption shall be available up to the tax year 2030-2031.

4.2. Post-amendment provision With effect from 01-04-2026, the TOLA 2026 proposes the following amendments to Entry 13A of Schedule IV:

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

(a) The exemption period has been extended for another 10 years, i.e., till tax year 204041 [See Para 4.2-1.]; (b) The definition of specified electronic goods is provided in Note 2A [See Para 4.2-2.].

4.2-1. Extension in the exemption period The exemption under this entry shall be available to the foreign company for the tax years 2026-27 to 2040-41. A proposed 10-year extension ensures that income arising from these assets remains non-taxable for a significant period, thereby encouraging the deployment of advanced manufacturing infrastructure in India.

4.2-2. Definition of Specified Electronic Goods The word ‘electronic goods’ is proposed to be replaced with the word ‘specified electronic goods’. The term “Specified Electronic Goods” is defined in Note 2A below the table of Schedule IV, which means— (a) mobile phones; or (b) laptops, all-in-one personal computers and tablets; or (c) servers and ultra-small form factor (USFF); or (d) sub-assemblies to the finished goods mentioned in clauses (a) to (c); or (e) hearables and wearables and accessories related to the finished goods mentioned in clauses (a) to (c). The introduction of Note 2A, which defines “Specified Electronic Goods,” marks a shift from a general category to a product-specific list. The explicit inclusion of mobile phones, laptops, servers, sub-assemblies, and wearables removes ambiguity. By including “sub-assemblies” and “accessories,” the amendment ensures that the entire component ecosystem is covered.

Amendment of conditions for providing exemption to foreign company procuring data centre services from a specified data centre [Schedule IV (Table Sl. No. 13C)]

5.1. Pre-amendment provision Entry 13C in Schedule IV of the ITA 2025 contains the following provisions: (a) The exemption is allowed to a foreign company notified by the Central Government; (b) The exemption is allowed to any income accruing or arising in India or deemed to accrue or arise in India; (c) The income should arise to the foreign company by way of procuring data centre services from a specified data centre;

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

(d) The foreign company does not own or operate any of the physical infrastructure or any resources of the specified data centre; (e) All sales by such a foreign company to users located in India are made through a reseller entity, being an Indian company; (f)

Such a foreign company maintains and furnishes such information in such form and manner as may be prescribed;

(g) Such exemption will be available up to the tax year 2046-47.

5.2. Post-amendment provision The TOLA 2026, with effect from 01-04-2026, proposes the following amendments: (a) The condition for the notification of the foreign company by the Central Government has been omitted [See Para 5.2-1.] (b) The definition of specified data centre is substituted in Note 3(c) [See Para 5.2-2.]

5.2-1. Omission of condition for the notification of the foreign company by the Central Government Currently, under Entry 13C of Schedule IV, a foreign company cannot claim an exemption unless the Central Government specifically notifies it in the Official Gazette. This process is often time-consuming and subject to administrative discretion. Removing this requirement would make the exemption self-executing for any foreign company that meets the remaining substantive conditions. The amendment would extend the exemption to all foreign companies procuring services from India, provided they fulfil other conditions.

5.2-2. Substitution of the definition of Specified Data Centre Note 3(a) of the Table in Schedule IV defines ‘data centre’. It provides that “data centre” means a dedicated, secure space within a building or a centralised location where computing and networking equipment is concentrated for the purpose of collecting, storing, processing, distributing, or allowing access to large amounts of data. Note 3(c) of the Table in Schedule IV defines ‘specified data centre’ as a data centre set up under an approved scheme and owned and operated by an Indian company. When this definition is read with the meaning of ‘data centre service’ provided in Note 3(b) of the Table in Schedule IV, it indicates that all resources and infrastructure should be in India. The TOLA 2026 proposes to substitute the definition of “specified data centre” in Note 3(c) of Schedule IV with “a data centre which—” (a) is operated by an Indian company, whether by way of owning or leasing; and (b) satisfies such other conditions as may be prescribed. Currently, Note 3(c)(ii) requires the Indian company to “own and operate” the data centre. This excludes many major operators who operate on leased land or in leased buildings. The amendment would allow these “asset-light” models to qualify as “specified data centres.” Substituting the definition of a “specified data centre” in Note 3(c) to include data

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

centres operated by an Indian company through “owning or leasing” is a welcome shift that recognises industry realities. This change ensures that the exemption to the foreign company is not denied merely because the Indian service provider does not hold legal title to the physical real estate. As long as the Indian company operates the facility (including the servers, networking, and cooling systems), the data centre qualifies for extending exemption to the foreign company. Further, the condition for the set-up under an approved scheme and the notification of the specified data centre by the Central Government (in the Ministry of Electronics and Information Technology) have also been omitted. The specified data centre shall fulfil such conditions as may be prescribed. A data centre’s status as “specified” will no longer depend on being part of a particular sectoral scheme or appearing in a specific government gazette. This broadens the pool of eligible Indian data centre providers from which foreign companies can procure services.

6. Exemption of interest on government securities (G-Sec) and capital gains arising from the sale, exchange or transfer of such securities to FIIs or the BIS [Schedule IV (Table Sl. No. 13D and 13E)] Entry No. 13D proposes to provide an exemption from interest on government securities (G-Sec) and capital gains arising from the sale, exchange or transfer of such securities to the Foreign Institutional Investors (FIIs). Entry 13E proposes to extend a similar exemption to the Bank for International Settlements (BIS).

6.1. Pre-amendment provision The pre-amended ITA 2025 did not provide any exemption to FIIs for interest income and capital gains arising from G-Secs. Such income was taxed under a special regime contained in Section 210 of the ITA 2025. This provision prescribed special tax rates on the income from ‘securities’, and on capital gains arising from the transfer of such securities to FPIs and specified funds. The term ‘securities’ takes its meaning from Section 2(h) of the Securities Contracts (Regulation) Act, 1956, which expressly includes Government securities along with shares, bonds, debentures and derivatives. The rates under this regime in respect of G-Secs were as follows: (a) Interest income earned by an FPI on securities is taxable at a concessional rate of 20%, subject to any more beneficial treatment under the applicable tax treaty. (b) Long-term capital gains are taxable at 12.5%, while short-term capital gains are taxable at 30%. Further, the payer was required to deduct tax at source, under Section 393(2) [Table S. No. 15] of the ITA 2025, before paying any income on securities to an FPI.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

Similarly, the ITA 2025 did not provide any specific exemption for the ‘Bank for International Settlements’, an institution established at the Hague Conference in 1930 and headquartered in Basel, Switzerland. It is the world’s oldest international financial institution, and the Reserve Bank of India has been a member since 1996. BIS is often called the bank for central banks because it accepts deposits from central banks and manages a portion of their foreign exchange reserves. The founding documents of the BIS contemplate tax immunity for the Bank in member countries, and most member countries grant it. However, the ITA did not contain any specific exemption for the BIS.

6.2. Post-amendment provision The proposed new entries 13D and 13E provide exemptions to FIIs and BIS from any interest on G-Secs, and any capital gains arising from the sale, exchange, or transfer of such G-Secs. The impact of these insertions in Schedule IV is discussed below.

6.2-1. Eligible Income The exemption is available for the following incomes: (a) Interest on G-Secs (b) Capital gains from the sale, exchange or transfer of G-Secs Note 4(c) to Schedule IV defines the term “government security” for the purposes of the exemption under this schedule. It provides that “Government security” shall have the same meaning as assigned to it in section 2(f) of the Government Securities Act, 2006 (‘GSA’). Section 2(f) of the GSA provides that the “Government security” means a security created and issued by the Government for the purpose of raising a public loan or for any other purpose and subject to such terms and conditions as may be notified by the Government in the Official Gazette. Section 2(e) of the GSA defines “Government”, in relation to any Government security, as the Central or State Government that issues the security.

6.2-1a. Types of G-Secs The G-Secs issued by the Central Government, State Government and Local Authorities can be classified into the following: (a) Treasury bills (T-bills): Short-term debt instruments issued by the Government of India, and are presently issued in three tenors, namely, 91-day, 182-day and 364-day. Treasury bills are zero-coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity. (b) Cash Management Bills (CMBs): They are similar to T-bills but are issued for maturities of less than 91 days. (c) Dated G-Secs: They carry a fixed or floating coupon (interest rate) which is paid on the face value, on a half-yearly basis. Generally, the tenor of dated securities ranges from 5 years to 40 years.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

6.2-1b. Popular G-Secs The following are the popular G-Secs issued by the Central Government, State Government and Local Authorities: Security Type

Issuer

Central Government Dated Securities (G-Secs)

Central Government

State Development Loans (SDLs)

State Governments

Treasury Bills (T-Bills)

Central Government

Cash Management Bills (CMBs)

Central Government

Floating Rate Bonds (FRBs)

Central Government

Sovereign Gold Bonds (SGBs)

Central Government

Special Securities (Oil Bonds, UDAY Bonds, FCI Bonds)

Central Government

STRIPS (Separate Trading of Registered Interest & Principal)

Central Government

Municipal / Local Authority Bonds

Local Bodies

6.2-1c. Eligible Assessees The exemptions under Entry 13D and 13E of Schedule IV are available to the FIIs and BIS. In view of Note 4(b) to Schedule IV read with Section 210(6)(a) of the ITA 2025, ‘Foreign Institutional Investor’ means such investors as the Central Government may notify, which in practice means Foreign Portfolio Investors registered with SEBI. Note 4(a) to Schedule IV defines the ‘Bank for International Settlements’ as the institution established at the Hague Conference in 1930 and headquartered at Basel, Switzerland.

6.2-1d. Conditions to claim the exemption The exemption is available only if the FII or the BIS furnishes information in the form and manner to be prescribed. The detailed requirements, such as the form, the particulars to be reported and the timelines, will be notified through rules.

6.2-1e. Period of exemption These entries have been inserted with effect from 01-04-2026 without any sunset date. Thus, the exemption shall be available to the eligible assessees for the eligible incomes earned on or after 01-04-2026, i.e., tax year 2026-27 and onwards.

6.2-1f. Exemption from TDS Section 393(2) [Table, S. No. 15] requires the deduction of tax from income payable to an FII in respect of securities referred to in Section 210(1). After the insertion of Entries 13D and 13E, income from Government securities is exempt and no longer forms part of the income from securities referred to in Section 210(1). Thus, no tax will be deductible by the

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

payer from the interest payable on G-Secs to FIIs and the BIS or the capital gains arising therefrom.

6.2-2. Comparison of earlier and amended tax regime The table below compares the implications for the FIIs before and after the proposed amendment: Particulars Interest on G-Secs.

Long-term capital gains from

Existing Position

After Amendment

Taxable at 20% under

Fully exempt under Entry 13D (FIIs)

Section 210

and Entry 13E (BIS) of Schedule IV

Taxable at 12.5%

Fully exempt

Taxable at 30%

Fully exempt

Taxable at 12.5%

No change

Taxable at 20%

No change

Taxable at 12.5%

No change

Taxable at 30%

No change

G-Secs. Short-term capital gains from G-Secs. Long-term capital gains from listed equity shares Short-term capital gains from the sale of listed equity shares Long-term capital gains from other securities Short-term capital gains from other securities Deduction of tax at source

Yes under Section

393(2) [Table S. No. 15] Note: The tax rate shall be further increased by surcharge and cess, if any.

Income arising from the sale of rough diamonds will be exempt from tax [Schedule IV: Table, Sl. No. 13F]

The Table in Schedule IV of the ITA 2025 provides a list of incomes that are not to be included in the total income of eligible non-residents, foreign companies and other such persons. The nature of income is defined in Column B, the eligible persons are mentioned in Column C, and the conditions for exemptions are mentioned in Column D of the said Table. The expressions used in the table are defined in the Notes below the said Table. With effect from 01-10-2026, the TOLA 2026 inserted Sl. No. 13F in the table, which provides as follows:

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

Sl.

Income

No.

not to be

Eligible persons

Conditions

included in total income A

13F.

Any in-

(a) The sale of rough diamonds is carried out

A foreign company:

come on (a) engaged in the busisale of ness of diamond minrough diing; or amonds

in any notified special zone as referred to in section 9(9)(c)(ii)(C);

(b) such foreign company maintains and furnishes such information in such form (b) being a sight holder of and manner, as may be prescribed; and the company referred to in clause (a); or

(c) Such exemption shall be available up to the tax year ending on the 31st March, (c) Being a broker, ag2041. gregator or a tender and

auction

entity

connected with sale of rough diamonds.

Note 5: For the purposes of Sl. No. 13F, the expression “rough diamond” means any diamond that is unworked or simply sawn, cleaved or bruted and falling under the Tariff Heading 7102 10, 7102 21, or 7102 31 of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and accompanied by the Kimberley Process Certificate.

7.1. Pre-amended position There is no corresponding provision in the ITA 2025 that provides an exemption for the income arising on sale of rough diamonds. Therefore, prior to the insertion of Serial No. 13F in Schedule IV, the taxability of such income is determined in accordance with the provisions of Section 9. Section 9 deals with cases of income that are deemed to accrue or arise in India. It includes the income accruing or arising, directly or indirectly, through or from any business connection in India. ‘Business Connection’ has not been defined explicitly in the Income-tax Act. However, the inclusive meaning of the term ‘business connection’ has been provided in Section 9(9). It provides that any business carried out in India where all or part of the operations are carried out in India shall constitute a business connection in India. A business carried out in India shall also include the following: (a) A business carried out by a non-resident through another person. (b) A business carried out by a non-resident through a dependent agent.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

However, Section 9(9)(c) provides that certain business activities or operations of the non-resident in India shall not be considered as a business carried out in India. One such activity, as provided in Section 9(9)(c)(ii)(C), is the display of uncut and unassorted diamonds in any special zone notified by the Central Government, in the case where such non-resident is a foreign company engaged in the business of mining of diamonds. Thus, the business activities or operations of the non-resident in India shall not be considered as a business carried out in India if the following conditions are satisfied: (a) The non-resident is a foreign company, (b) It is engaged in the business of mining of diamonds, and (c) The business activities or operations are confined to the display of uncut and unassorted diamonds in any special zone notified by the Central Government. Accordingly, where the activities of the foreign company are restricted to the display of rough diamonds in the notified Special Zone, no business connection is established in India merely on account of such display. It must be noted that the above exclusion is confined only to the activity of display. It does not extend to the sale of rough diamonds. Therefore, where the foreign company undertakes sale transactions in India, the protection under section 9(9)(c)(ii)(C) is not available. In such cases, if the conditions for the existence of a business connection are satisfied, the income attributable to such business connection becomes chargeable to tax in India in accordance with the provisions of the Act.

7.1-1. Safe harbour rules Recognising the practical difficulties in determining the income deemed to accrue or arise in India under Section 9, Section 167 empowers the CBDT to prescribe safe harbour rules for income determination in such cases. Pursuant to this power, Rules 99 to 102 of the Income-tax Rules, 2026 prescribe a special taxation regime for foreign diamond mining companies engaged in the business of selling raw diamonds in a notified Special Zone. These rules are designed to provide a simplified and clear tax regime for such entities. Rule 99(f) of the Income-tax Rules, 2026 (IT Rules), provides a precise definition of “raw diamonds”. For a diamond to qualify as a “raw diamond” under these rules, it must simultaneously satisfy all the following conditions: (a) It must be uncut or unpolished. (b) It must be unassorted. (c) It must be unworked or simply sawn, cleaved, or bruted. (d) It must not be a conflict diamond as defined by the Kimberley Process. (e) It must be accompanied by a Kimberley Process Certificate issued by the Kimberley Process authority in the exporting country. (f)

It must fall under Tariff Heading 7102 of the First Schedule to the Customs Tariff Act, 1975.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

Rule 100(2) provides that the profits and gains of the eligible business chargeable to tax under the head “Profits and gains of business or profession” shall be 4% or more of the gross receipts from such business. Thus, prior to the insertion of Serial No. 13F in Schedule IV, income arising to a foreign diamond mining company from the sale of rough diamonds in India was not exempt from tax. Where the sale of rough diamonds resulted in a business connection in India, the foreign company could either determine its taxable profits under the normal provisions of the Act or, if eligible, opt for the safe harbour regime under section 167 read with Rules 99 to 102.

7.2. Post-amendment position The new entry 13F in the Schedule IV inserted by the TOLA 2026, with effect from 01-102026, provides as follows: (j)

The exemption under Entry 13F shall apply to a foreign company [see Para 7.2-2.];

(k) The exemption will be available for any income arising from the sale of rough diamonds [see Para 7.2-3.]; (l)

The sale of rough diamonds is carried out in the notified special zone [see Para 7.24.];

(m) The foreign company maintains and furnishes the information in the prescribed manner [see Para 7.2-5.]; (n) Such exemption shall be available up to the tax year 2040-2041 [see Para 7.2-6.].

7.2-1. A new exemption is introduced w.e.f. 01-10-2026 The new Entry 13F provides tax exemptions and favourable frameworks for the sale of rough diamonds within Special Notified Zones (SNZs). The exemption aims to eliminate overseas middlemen, lower sourcing costs, and secure a direct raw-material supply for India’s massive diamond processing industry. Although India cuts and polishes around 90% of the world’s diamonds, foreign mining giants traditionally avoided direct sales in India due to corporate tax liabilities, forcing domestic manufacturers to buy from trading hubs. By offering targeted tax relief, the government encourages top mining companies to bring rough diamonds directly to Indian bourses.

7.2-2. Exemption to eligible foreign companies The exemption under Entry 13F will be available to a foreign company: (a) engaged in the business of diamond mining; or (b) being a sight holder of the company referred to in clause (a); or (c) being a broker, aggregator or a tender and auction entity connected with the sale of rough diamonds.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

7.2-2a. Meaning of ‘foreign company’ The exemption under this entry is allowed to a foreign company. The foreign company is defined in Section 2(46) of the ITA 2025 (corresponding to Section 2(23A) of the ITA 1961) as “a company which is not a domestic company”. As per section 2(42) of the ITA 2025 (corresponding to Section 2(22A) of the ITA 1961), an Indian company is always considered a domestic company. As per section 2(53) of the ITA 2025 (corresponding to Section 2(26) of the ITA 1961), an Indian company means a company formed and registered under the Companies Act, 1956 or the Companies Act, 2013. In short, the exemption under this entry shall not be allowed to: (a) Any Indian or domestic company, even if it is the wholly owned subsidiary of a foreign company; (b) Any foreign enterprise not being a foreign company (i.e., partnership firm, LLP, etc.). The exemption shall be available even if the place of effective management (POEM) of such foreign company is in India and it is considered as resident in India on account of POEM.

7.2-2b. Eligible business The exemption under this entry is allowed to a foreign company if it is engaged in any of the following businesses. (a) Diamond mining These are companies that explore, develop, and operate diamond mines and extract rough diamonds from the earth. They undertake mining, recovery, initial sorting, and sale of rough diamonds. Such companies are typically the first owners of the diamonds after extraction and generally sell them through long-term contracts, tenders, auctions, or spot sales. (b) Sightholder A sightholder is a company selected by a major diamond mining company to purchase rough diamonds directly under a long-term supply arrangement. The mining company periodically invites selected buyers to “sights,” where parcels of rough diamonds are offered for sale. (c) Broker, aggregator or a tender and auction entity These are intermediaries or market facilitators involved in the marketing and sale of rough diamonds. A broker acts as an intermediary between buyers and sellers and earns a commission without normally taking ownership of the diamonds. An aggregator collects rough diamonds from multiple mining companies or suppliers, combines them into commercial parcels, and markets them to buyers. A tender or auction entity organises competitive sales of rough diamonds by inviting eligible buyers to submit bids, thereby facilitating transparent price discovery and efficient distribution.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

7.2-3. Exemption for the eligible income The exemption under this entry shall be available for any income arising from the sale of rough diamonds. The meaning of ‘rough diamonds’ is provided in Note 5 of Schedule IV. On paraphrasing, the exemption is available for the income from the sale of a diamond which: (a) Is unworked or simply sawn, cleaved or bruted [see Para 7.2-3a.]; (b) Falls under the Tariff Heading 7102 10, 7102 21, or 7102 31 of the First Schedule to the Customs Tariff Act, 1975; and (c) Is accompanied by the Kimberley Process Certificate. 7.2-3a. Eligible diamonds Diamonds are extracted from mines in their natural uncut and unworked form, exactly as they occur in nature. After recovery, they may be sold as unassorted rough diamonds, where stones of varying sizes, shapes, colours, and qualities are mixed together, or they may first be sorted into different categories. To prepare rough diamonds for manufacturing, some are simply sawn using precision saws or lasers to divide larger crystals into workable pieces, while others are cleaved along their natural crystal planes to maximise yield and remove imperfections. The stones may then undergo bruting, a process that rounds and shapes the rough diamond to form its basic outline before faceting. Throughout these stages, the diamonds remain unpolished, as no facets have yet been cut or polished. Finally, skilled artisans facet and polish the diamonds to enhance their brilliance, after which they are graded, certified, and sold as finished gemstones in domestic or international markets. The following table explains the process involved in each stage from mining to its final sale: Stage

Diamond Form

Description

1. Mining

Uncut / Unworked

Diamonds are extracted from mines in their natural rough form without any human processing.

2. Initial Handling

Unassorted

Rough diamonds are cleaned and may be sold or transported as mixed lots containing stones of different sizes, shapes, colours, and qualities before sorting.

3. Sorting

Assorted Rough Di- Diamonds are classified based on size, shape, colour, clarity, amonds and intended use (gem or industrial).

4. Sawing

Simply Sawn

Large rough diamonds are divided into smaller pieces using a laser or diamond saw to maximise yield and facilitate further processing.

5. Cleaving

Cleaved

Diamonds are split along their natural crystal planes to remove flaws or create workable pieces. This may be used instead of, or in addition to, sawing.

6. Shaping

Bruted

The rough diamond is rounded or shaped to form its basic outline (girdle) by rubbing it against another diamond or using a diamond-coated wheel. No facets have yet been polished.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

Stage

Diamond Form

Description

7. Faceting

Faceted Diamond

Precise facets are cut on the diamond to maximise its brilliance, fire, and scintillation. The diamond is still undergoing manufacture.

8. Polishing

Polished Diamond

Each facet is polished to produce the desired optical finish, transforming the rough stone into a finished gemstone.

9. Grading & Certification

Certified Polished The polished diamond is graded for the 4Cs (carat, cut, colour, Diamond and clarity) and may be certified by recognised gemmological laboratories.

10. Sale

Finished Product

Diamond The certified loose diamond or diamond jewellery is sold to the final consumer through jewellery retailers, online platforms, or auction houses.

The exemption will not be available to every income arising at each step discussed above, but for the income arising from the sale of unworked or simply sawn, cleaved or bruted diamonds. For income arising at other steps, the income will be taxable in India subject to the safe harbour rules and the relevant DTAA.

7.2-3b. Diamonds fall under the Customs Tariff Act The exemption will be available if the eligible diamonds fall under the 7102 10, 7102 21, or 7102 31 Tariff Heading of the First Schedule to the Customs Tariff Act, 1975. The following table provides all diamonds classified under the Tariff heading of 7102 and whether income arising from the sale of such diamonds is eligible for exemption: Tariff Item

Description of goods

Is eligible for exemption

7102

Diamonds, whether or not worked, but not mounted or set

7102 10 00

Unsorted

Yes

Industrial: 7102 21

Unworked or simply sawn, cleaved or bruted:

7102 21 10

Sorted

Yes

7102 21 20

Unsorted

Yes

7102 29

Other:

7102 29 10

Crushed

7102 29 90

Other

Non-industrial: 7102 31 00

Unworked or simply sawn, cleaved or bruted

Yes

7102 39

Others:

7102 39 10

Diamond, cut or otherwise worked but not mounted or set

7102 39 90

Other

7.2-3c. Kimberley Process Certificate Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

The Kimberley Process Certificate (KPC) is an official government-issued certificate that accompanies shipments of rough diamonds in international trade. It certifies that the rough diamonds are conflict-free, meaning they have not been used to finance armed conflict or rebel movements. 7.2-4. Notified Special Zone The exemption under Entry 13F is available provided the sale of rough diamonds is carried out in any notified special zone. The concept of the Special Notified Zone (SNZ) was introduced through Para 4.49 of the Foreign Trade Policy (FTP). The provision permits eligible foreign entities to import rough diamonds into the SNZ for display and sale through tenders or auctions, and to re-export any unsold diamonds under Customs supervision. The Government of India has notified the following SNZs to facilitate the import, display, tender, auction, sale, and re-export of raw (uncut) diamonds by eligible foreign entities: (a) Bharat Diamond Bourse, Mumbai, Maharashtra1 (b) Gujarat Hira Bourse, Ichhapore, Surat, Gujarat2

7.2-5. Furnishing of prescribed information The exemption under Entry 13F is available subject to the condition that the eligible foreign company maintains and furnishes such information in such form and manner as may be prescribed. The CBDT shall notify the rules in respect of this condition. 7.2-6. Exemption up to the tax year 2040-41 The exemption under this entry shall be available to the foreign company for the period 01-10-2026 to 31-03-2027 falling in the tax year 2026-27 and tax years from 2027-28 to 204041. Where, on non-fulfilment of any condition, the exemption is not allowed to the foreign company, the taxability of the income arising to such a foreign company will be decided as per the general provisions read with the relevant DTAA. The final taxability of income will depend upon the following factors: (a)

For taxability under the ITA 2025, one must consider whether a source or a business connection exists in India and the nature of the income.

(b)

For taxability under the relevant DTAA, the nature of the income and the existence of a PE in India must be considered.

8. Income arising to a foreign company on account of storage components in a warehouse in a customs-bonded area will be exempt from tax [Schedule IV: Table, Sl. No. 13G] The Table in Schedule IV of the ITA 2025 provides a list of incomes that are not to be included in the total income of eligible non-residents, foreign companies and other such

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

persons. The nature of income is defined in Column B, the eligible persons are mentioned in Column C, and the conditions for exemptions are mentioned in Column D of the said Table. The expressions used in the table are defined in the Notes below the said Table. With effect from 01-10-2026, the TOLA 2026 inserted Sl. No. 13G in the table, which provides as follows: Sl. No.

Income not to be included in total income

Eligible persons

Conditions

13G.

Any income accruing or arising on account of storage of components in a warehouse in a customs bonded area.

A foreign company, which stores components in a warehouse in a customs bonded area for providing them to a contract manufacturer to be used for manufacturing of specified electronic goods.

(a) Such exemption shall be available on sale of components by such foreign company; (b)

such contract manufacturer produces electronic goods on behalf of any foreign company;

(c)

such exemption shall be subject to furnishing of information in such form and manner, as may be prescribed; and

(d)

such exemption shall be available up to the tax year ending on the 31st March, 2041.”

Note 6: For the purposes of Sl. No. 13G,— (a) “contract manufacturer” means an Indian company which produces specified electronic goods on behalf of any foreign company in a custom bonded area; (b) “custom bonded area” means a warehouse as referred to in section 65 of the Customs Act, 1962 (52 of 1962); and (C) “specified electronic goods” shall have the meaning assigned to it in Note 2A.’ Note 2A: For the purposes of Sl. No. 13A, the expression “specified electronic goods” means— (a) mobile phones; or (b) laptops, all-in-one personal computers and tablets; or (c) servers and ultra small form factor (USFF); or (d) sub-assemblies to the finished goods mentioned in clauses (a) to (c); or (e) hearables and wearables and accessories related to the finished goods mentioned in clauses (a) to (c).’ Definition of “specified electronic goods” as defined under Note 2A applies both for the purposes of SI. No. 13A and SI. No. 13G of Schedule IV.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

8.1. Pre-amended position There is no corresponding provision in the ITA 2025 that provides an exemption for such income. However, an exemption under Entry 13A of Schedule IV, inserted by the Finance Act 2026, with effect from 01-04-2026, is allowed to a foreign company for any income arising on account of providing capital goods, equipment or tooling to a contract manufacturer, being a company resident in India, for use in electronic manufacturing in India.

8.2. Post-amendment position The new entry 13F in the Schedule IV inserted by the TOLA 2026 provides as follows: (a) The exemption under Entry 13F shall apply to a foreign company with effect from 01-10-2026 [see Para 8.2-2.]; (b) The exemption will be available for any income accruing or arising on account of storage of components in a warehouse in a customs bonded area [see Para 8.2-3.]; (c) Such components should be provided to a contract manufacturer to be used for manufacturing of specified electronic goods [see Para 8.2-4.] (d) The warehouse should be located in a customs bonded area [see Para 8.2-5.] (e) The contract manufacturer produces electronic goods on behalf of any foreign company in a custom bonded area [see Para 8.2-6.]; (f)

The foreign company maintains and furnishes the information in the prescribed manner [see Para 8.2-7.];

(g)

Such exemption shall be available up to the tax year 2040-2041 [see Para 8.2-8.].

8.2-1. A new exemption is introduced w.e.f. 01-10-2026 To boost electronics manufacturing in India, the Government of India has established a comprehensive ecosystem under the National Policy on Electronics 2019, led by the heavily expanded Electronics Component Manufacturing Scheme (ECMS). This is supported by the Production Linked Incentive (PLI) schemes, which offer cash rewards for incremental sales of specified electronics goods, alongside the India Semiconductor Mission (ISM) 2.0, which provides substantial capital support for chip fabrication and indigenous design. In this context, and in order to promote the manufacturing of electronic goods by a contract manufacturer and provide certainty on the taxation of the supply of capital equipment by a foreign company to such manufacturer, an exemption under Entry 13A has been extended to a foreign company on any income arising on account of providing capital goods, equipment or tooling to a contract manufacturer. Entry 13A, inserted by the Finance Act, 2026, in the ITA 2025, provides an exemption to a foreign company that is providing capital goods, equipment, or tooling to the contract manufacturer for use in electronic manufacturing in India. TOLA 2026 introduces another Entry 13G to extend the exemption to income arising from the sale of components by such foreign company to the contract manufacturer who is producing the electronic goods for any foreign company in the customs-bonded warehouse.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

8.2-2. Exemption to eligible foreign companies The exemption under this entry is allowed to a foreign company. The foreign company is defined in Section 2(46) of the ITA 2025 (corresponding to Section 2(23A) of the ITA 1961) as “a company which is not a domestic company”. As per section 2(42) of the ITA 2025 (corresponding to Section 2(22A) of the ITA 1961), an Indian company is always considered a domestic company. As per section 2(53) of the ITA 2025 (corresponding to Section 2(26) of the ITA 1961), an Indian company means a company formed and registered under the Companies Act, 1956 or the Companies Act, 2013. In short, the exemption under this entry shall not be allowed to: (a) Any Indian or domestic company, even if it is the wholly owned subsidiary of a foreign company; (b) Any foreign enterprise not being a foreign company (i.e., partnership firm, LLP, etc.). The exemption shall be available even if the place of effective management (POEM) of such foreign company is in India and it is considered as resident in India on account of POEM.

8.2-3. Exemption for the eligible income The exemption under this entry shall be available for any income accruing or arising on account of storage of components in a warehouse in a customs bonded area. Condition (a) provides that the exemption shall be available on sale of such components. On paraphrasing, the exemption is available for the income when: (a) The income accrues or arises on account of storage of components in a warehouse; and (b) Such components are sold to the contract manufacturer. It is pertinent to note that income does not accrue or arise merely because the components are stored in a warehouse located in a customs bonded area. Storage is only a qualifying condition for availing the exemption. The income accrues or arises only upon the sale of the stored components to the contract manufacturer. Consequently, the question of allowing the exemption arises only when such sale of components takes place and not at the stage of storage.

8.2-3a. Meaning of ‘Accrues or arises’ These words have been defined as under: (a) The dictionary meaning of the word ‘accrue’ is ‘to come as an accession, increment, or produce; to fall to one by way of advantage: to fall due’. The income can, thus, be said to accrue when it becomes due [Morvi Industries Ltd. V. CIT [1971] 82 ITR 835 (SC)] (b) The meaning of the word ‘accrue’ or ‘arise’ in section 4(1)(b)(i) of the 1922 Act, cannot be extended so as to take in amounts received in a later year though the receipt was not on the basis of a right accrued in the earlier year [CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC) ] Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

(c) The words ‘accrue’ and ‘arise’ are used to contradict the word ‘receive’. Income is said to be received when it reaches the ssesse; when the right to receive the income becomes vested in the ssesse, it is said to accrue or arise [CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC) ] (d) The meaning of the word ‘accrue’ is ‘to fall as a natural growth or increment; to come as an accession or advantage’. The word ‘arise’ is defined as ‘to spring up, to come into existence’. The words ‘accrue’ and ‘arise’ do not mean actual receipt of the profits or gains. Both these words are used in contradistinction to the word ‘receive’ and indicate a right to receive [Seth Pushalal Mansinghka (P.) Ltd. V. CIT [1967] 66 ITR 159 (SC) ] (e) According to the Oxford English Dictionary, the meaning of the word ‘accrue’ is ‘to fall as a natural growth or increment; to come as an accession or advantage’. The word ‘arise’ is defined as ‘to spring up, to come into existence’. The words ‘accrue’ and ‘arise’ do not mean actual receipt of the profits or gains. Both these words are used in contradistinction to the word ‘receive’ and indicate a right to receive [CIT v. Govind Prasad Prabhu Nath [1987] 35 Taxman 513/171 ITR 417 (Allahabad)]. Thus, where an income ▶

is received after accrual,

▶

accrues or arises but is not received,

between 01-10-2026 and 31-03-2041, the exemption shall be available for such income provided other conditions are also satisfied.

8.2-3b. Meaning of ‘On Account of’ The term ‘on account of’ has been defined judicially and, as per the dictionary, as follows: (a) For one’s own sake; on one’s responsibility [Chambers’ 20th Century Dictionary, New Edition, page 8] (b) By reason of; because of; for the sake of [Random House Dictionary of the English Language, College Edition, Page 10] (c) In consideration of; because of [The Reader’s Digest Great Encyclopaedic Dictionary, Volume 1, page 23] (d) For and at one’s own purpose and risk [Concise Oxford Dictionary 7th Edition page 7] (e) Because of; by reason of [Collins English Dictionary at Page 9] (f)

By reason of; because of; for the sake of; in consideration of [DIT v. Schlumberger Asia Services Ltd., [2019] 104 taxmann.com 353/264 Taxman 108/414 ITR 1 (Uttarakhand)]

When a man makes a contract ‘on account of’ someone else, he does not bind himself, but binds his principal [Gadd v. Houghton, (1876) 1 Ex. 357 cited in Radhakrishna Sivadutta Rai v. Tayeballi Dawoodbeai, AIR 1962 SC 538, (1962) 1 SCR Supl. 81 (SC)].

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

From the above, it appears that ‘on account of’ means because of or by reason of. Thus, income has to arise because of storage of components in a customs bonded warehouse and sale thereof to the contract manufacturer. There should be a nexus between income and the sale of components to the contract manufacturer.

8.2-4. Use of ‘Component’ for manufacturing electronic goods The exemption shall be available for the income accruing or arising from the sale of the components provided these components are sold to a contract manufacturer to be used for manufacturing specified electronic goods. The expression ‘component’ is not defined under the Act. Therefore, reference can be made to dictionaries and judicial precedents to understand the meaning of this expression: (a) Components are items or parts which are used in the manufacture of the final product and without which the final product cannot be conceived of [Saraswati Sugar Mills v. CCE, AIR 2011 SC 3286] (b) Component parts are those which were initially used in the assembly or manufacture of a machine, and spare parts were those parts which are used for the subsequent replacement therein of worn-out parts. A spare part is not a component part [Hindustan Sanitaryware v. CC, (2000) 10 SCC 224, (1999)] (c) A screw cap on a bottle containing Horlicks was a component part of Horlicks, it being an essential ingredient to complete the process of manufacture to make Horlicks marketable [H.M.M. Ltd. V. CCE, (1994) 6 SCC 594 explained in Hindustan Lever Ltd. V. State of Karnataka, AIR 2016 SC 4140] (d) A component part is a part which goes in the composition of an article, and after it becomes part of such article it may retain its identity, or it may even lose its identity and not be capable of separate identification [Vithal Chhagan & Sons v. The State of Gujarat, (1966) 17 STC 96 (Guj)] Thus, the exemption will be available for the income from the sale of components to the contract manufacturer to be used for manufacturing the specified electronic goods. Where any spare parts are sold to the contract manufacturer for the capital goods, equipment or tooling, no exemption shall be available for such income.

8.2-5. Customs Bonded Warehouse 8.2-5a. Overview of Section 65 of the Customs Act, 1962 Section 65 of the Customs Act provides that, with the permission of the Principal Commissioner or Commissioner of Customs and subject to Section 65A and prescribed conditions, the owner of warehoused goods may undertake manufacturing processes or other operations within the warehouse. However, the Central Government may notify certain manufacturing processes or operations for specified goods that shall not be permitted in a warehouse. Further, where waste or refuse arises from such operations, import duty shall be remitted

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

on the portion attributable to exported goods, provided such waste is destroyed or duty is paid as if imported in that form; whereas, if the resultant goods are cleared for home consumption, import duty shall be levied on the portion of warehoused goods contained in the waste or refuse arising from such operations.

8.2-5b. Customs-Bonded area The expression ‘customs bonded area’ is widely used in trade and customs practice. However, it is not defined as a standalone term under the Customs Act, 1962. The concept is derived from the statutory definitions of ‘customs area’ and ‘warehouse’, read with the provisions governing warehousing of goods. In essence, a customs bonded area refers to a licensed warehouse (public, private, or special) forming part of the ‘customs area’ under Section 2(11) of the Customs Act, where imported dutiable goods may be stored without immediate payment of customs duty and remain under customs control until clearance for home consumption or re-export. The Supreme Court, in N.K. Bapna v. Union of India 1992 (60) E.L.T. 13 (S.C.) affirmed that goods stored in a bonded warehouse are treated as an extension of the customs area, and the import process is completed only upon their final clearance. It is also pertinent to note that the Manufacture and Other Operations in Warehouse (No. 2) Regulations, 2019, notified under Section 65 of the Customs Act, permit manufacturing and other operations only in warehouses licensed under Section 58 as private warehouses. In other words, Section 65 does not permit manufacturing and other operations in all customs bonded areas; such activities are restricted to customs bonded areas specifically licensed as private warehouses under Section 58.

8.2-5c. Conditions for undertaking manufacturing and other operations The prescribed conditions for undertaking manufacturing, import, and export under Section 65, as prescribed under the said Regulations, include: (a) Obtaining a licence under Section 58 as a private warehouse; (b) Maintaining proper accounts and records; (c) Undertaking to execute the prescribed bond; and (d) Undertaking to provide input–output norms, wherever required.

8.2-6. Produces on behalf of any foreign company The exemption under this entry applies if the contract manufacturer produces electronic goods on behalf of any foreign company. On paraphrasing, this condition requires: (a) contract manufacturer [see Para 8.2-6a.] (b) produce [see Para 8.2-6b.] (c) electronic goods [see Para 8.2-6c.] (d) on behalf [see Para 8.2-6d.] (e) any foreign company [see Para 8.2-6e.]

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

8.2-6a. Meaning of ‘Contract Manufacturing’ There is no statutory definition of the term ‘contract manufacturing’ in the ITA 2025. One can look to the OECD Transfer Pricing Guidelines, which provide guidance on characterising ‘contract manufacturing’ through a Functional, Asset, and Risk (FAR) analysis. From an OECD perspective, a contract manufacturer is typically characterised as an entity that performs routine manufacturing functions for a principal, often utilising the principal’s intellectual property (IP), designs, or specifications. Key characteristics that emerge from a FAR analysis, consistent with OECD principles, include: (a) Limited Risk Assumption: The contract manufacturer typically assumes limited risks, such as routine operational risks, but generally not significant market risks, inventory obsolescence risks, or R&D risks. These significant risks are usually borne by the principal. (b) Limited Asset Ownership: While the contract manufacturer owns its manufacturing plant and equipment, it generally does not own the economically significant intangible assets (e.g., patents, trademarks, know-how) related to the products it manufactures. These are typically owned by the principal. (c) Routine Functions: The functions performed by a contract manufacturer are generally routine, focusing on the physical production process, quality control, and, when directed by the principal, basic procurement or logistics. (d) Dependence on the Principal: There is often a high degree of dependence on the principal for raw material supply, technical specifications, quality standards, and the sale of finished goods. The principal typically controls the strategic aspects of the business. (e) No Ownership of Output: The contract manufacturer usually does not take ownership of the final product for resale in the open market; rather, the manufactured goods are sold back to the principal or to third parties specified by the principal. This characterisation is analogous to how the CBDT Circulars (e.g., Circulars No. 3/2013 and 6/2013, which are specifically for contract R&D services) guide the functional profiling of ‘development centres engaged in contract R&D services with insignificant risk’. These circulars emphasise that the parties’ actual conduct, rather than merely the contractual terms, must be examined to determine the true functional and risk profile. The Indian judiciary, in alignment with OECD principles, defined contract manufacturing through a comprehensive analysis of the functions performed, assets employed, and risks assumed by the entity. Some of these rulings are given below: (a) The assessee lacked product conceptualisation, business development, quality standards, and research and development capabilities. It manufactured products based on designs provided by the AE, sourced raw materials largely from the AE, and had quality parameters controlled by the AE. The assessee was more akin to a job work or contract manufacturer, emphasising that the actual functions performed, rather than self-declarations, dictate the characterisation [Alpha-Elsec Defence & Aerospace Systems (P.) Ltd. vs. Dy. CIT [2025] 176 taxmann.com 890 (Bangalore Trib.) ]

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

(b) The ruling explicitly differentiated between contract manufacturing and license manufacturing. The Tribunal held that the risk involved in contract manufacturing is lower, and the assessee is not required to maintain inventory at its own risk, whereas in the case of license manufacturing, the assessee has to maintain its own inventory [Dy. CIT vs. Schneider Electric Infrastructure Ltd. [2023] 156 taxmann.com 405 (Ahmedabad - Trib.)] (c) In Principle CIY vs. Samsung India Electronics (P.) Ltd. [2024] 164 taxmann. com 706/467 ITR 197 (Delhi), the Delhi High Court held that the assessee, which manufactured and sold mobile phones under the Samsung brand, was not a contract manufacturer. The court found that the assessee manufactured goods at its own behest, made independent decisions regarding production and sales, and its sales to group companies were driven by open market conditions. This case highlights that if an entity bears its own entrepreneurial risks, makes independent decisions, and is not merely manufacturing on the direction of an AE, it would be characterised as a licensed manufacturer rather than a contract manufacturer. A similar view was taken in CIT vs. Keihin Panalfa Ltd. [2016] 70 taxmann.com 328/381 ITR 407 (Delhi), where the assessee was held to be an original equipment manufacturer (OEM) rather than a contract manufacturer.

8.2-6b. Meaning of ‘Produce’ The exemption applies if the contract manufacturer produces electronic goods. The term ‘produce’ has been defined judicially and, as per the dictionary, as follows: (a) The word ‘production’ has a wider connotation in comparison to ‘manufacture’, and any activity that brings a commercially new product into existence constitutes production [CIT v. Hindustan Petroleum Corporation Ltd., Civil Appeal No. 9295 of 2017 (SC), dt. 03.08.2017] (b) The word ‘production’, when used in juxtaposition with the word ‘manufacture’, refers to bringing into existence new goods by a process which may or may not amount to manufacture. The word ‘production’ takes in all the by-products, intermediate products and residual products which emerge in the course of the manufacture of goods [ITO v. Arihant Tiles & Marbles (P.) Ltd., [2009] 186 Taxman 439/[2010] 320 ITR 79 (SC)] (c) The word ‘produce’ is defined as something that is brought forth or yielded, either naturally or as a result of effort and work (see Webster’s New International Dictionary) [Vijay Ship Breaking Corpn. v. CIT, (2010) 10 SCC 39, [2008] 175 Taxman 77/[2009] 314 ITR 309 (SC)] (d) In Black’s Law Dictionary, the meaning of the word ‘produce’ is to ‘bring into view or notice; to bring to surface’ [CIT v. Venkateswara Hatcheries (P.) Ltd. [1999] 3 SCC 632), CIT v. N.C. Budharaja & Co. (1994 Supp 1 SCC 280)] (e) The expressions ‘manufacture’ and ‘produce’ are normally associated with movable articles and goods, big and small, but they are never employed to denote the construction activity of the nature involved in the construction of a dam or, for that matter, a bridge, a road and a building [Moti Laminates (P.) Ltd. v. Collector of Central Excise, Ahmedabad [1995] 3 SCC 23)]

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

(f)

Advanced Law Lexicon, 3rd Edn. by P. Ramanatha Aiyar, defines the expression ‘production’ that it includes packing, labelling, relabelling of containers, re-packing from bulk packages to retail packages, and adoption of any other method to render the product marketable [India Cine Agencies v. CIT, [2008] 175 Taxman 361/[2009] 308 ITR 98 (SC), followed in India Cine Agencies v. DCIT, [2012] 25 taxmann.com 366/210 Taxman 253 (SC),[2012] 25 taxmann.com 366/210 Taxman 253 (SC)]

This condition should be considered fulfilled if the contract manufacturer uses the components purchased from the foreign company to bring a new product into existence, even if that does not amount to manufacture as defined in Section 2(69) of the ITA 2025 (corresponding to Section 2(29BA) of the ITA 1961). It may be noted that a foreign company is eligible for exemption where it provides components for use in electronic manufacturing in India. However, the specific conditions state that the contract manufacturer should produce electronic goods. As discussed above, the term “produce” is wider in scope and may or may not necessarily include “manufacture.” Thus, while the eligibility provision refers to manufacturing, the condition refers to production. It should also be noted that the production should be in a customs-bonded warehouse.

8.2-6c. Meaning of ‘Electronics’ ‘Electronics’ is concerned with designing, constructing, and applying devices and systems that utilise the controlled flow of electrons or other charge carriers in a vacuum, gas, or semiconductor. Essentially, it deals with manipulating electrical signals to perform various tasks, from simple amplification to complex information processing. This involves using components such as transistors, diodes, integrated circuits, and other semiconductors to create circuits that control, amplify, switch, and process electrical signals, enabling a wide range of applications, from communication and computing to consumer electronics and industrial automation. The terms “electric” and “electronics” are often used interchangeably, but they represent distinct, though related, concepts. Essentially, “electric” pertains to generating, distributing, and utilising electrical power. Conversely, “electronics” focuses on controlling and manipulating electrical flow, particularly in smaller, more precise applications. Electronic devices use components such as transistors and diodes to process and manage information. In essence, “electric” refers to the raw power of electricity, while “electronics” focuses on the intricate control of that power to perform specific tasks. Therefore, while all electronic devices require electricity to function, not all electric devices involve the complex control that defines electronics. A toaster, kettle, fan, or electric oven is an example of an “electric” appliance, as they directly convert electrical energy into a desired output. Mobile phones, laptops, smart watches, etc., are examples of “electronic” devices. For the purpose of exemption under this entry, the expression “specified electronic goods” means:

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

(a) mobile phones; or (b) laptops, all-in-one personal computers and tablets; (c) servers and ultra small form factor (USFF); or (d) sub-assemblies to the finished goods mentioned in clauses (a) to (c); or (e) hearables and wearables and accessories related to the finished goods mentioned in clauses (a) to (c).’ The exemption under this entry should be available where the focus is entirely on manufacturing specified electronic goods and no exemption will be available for goods that are both electric and electronic, such as TVs or refrigerators with circuits, processors, etc.

8.2-6d. Meaning of ‘on behalf of’ The exemption applies if the contract manufacturer produces electronic goods on behalf of the foreign company. The term ‘on behalf of’ has been defined judicially and, as per the dictionary, as follows: (a) The words “on behalf of” are synonymous with the expression “for the benefit of” [Suhashini Karuri v. Wealth-tax Officer, Calcutta [1962] 46 ITR 953 (Calcutta) ] (b) The words ‘on behalf of’ in the statute connote an agency when one person acts on behalf of the other. The former acts as the agent of the latter [Interocean Shipping Company v. CST, [2012] 28 taxmann.com 238/[2012] 39 STT 883 (New Delhi - CESTAT) (CESTAT)] (c) The expression ‘on behalf of’ connotes some benefit to the persons on whose behalf another person may act [Uttam Chand v. Emperor, (1912) 39 ILR 344 (Cal)] (d) According to the New Shorter Oxford English Dictionary, this expression means ‘as the agent or representative of another; in the name of’ [Kno WerX Education (India) (P.) Ltd., In re [2008] 170 Taxman 98/301 ITR 207 (AAR)] To check whether the contract manufacturer is producing on behalf of the foreign company, one may consider whether the contract manufacturer relies on the principal for raw material supply, technical specifications, and quality standards to produce electronic goods. The contract manufacturer should assume limited risks, such as routine operational risks, but not significant market risks, inventory obsolescence risks, or R&D risks. These significant risks are usually borne by the principal. The contract manufacturer usually does not take ownership of the final product for resale in the open market; rather, the manufactured goods are sold back to the principal or to third parties specified by the principal.

8.2-6e. Produces on behalf of ‘any foreign company’ It is pertinent to note that the exemption is available to the foreign company that supplies the components to the contract manufacturer. However, the provision does not require that such components must be used for producing electronic goods on behalf of the same foreign company. The use of the expression “any foreign company” indicates that the exemption remains available even where the eligible contract manufacturer utilises the components to manufacture specified electronic goods on behalf of another foreign company.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

8.2-7. Furnishing of prescribed information The exemption under Entry 13G is available subject to the condition that the eligible foreign company maintains and furnishes such information in such form and manner as may be prescribed. The CBDT shall notify the rules in respect of this condition.

8.2-8. Exemption up to the tax year 2040-41 The exemption under this entry shall be available to the foreign company for the period 01-10-2026 to 31-03-2027 falling in the tax year 2026-27 and tax years from 2027-28 to 204041. Where, on non-fulfilment of any condition, the exemption is not allowed to the foreign company, the taxability of the income arising to such a foreign company will be decided as per the general provisions read with the relevant DTAA. The final taxability of income will depend upon the following factors: (c) For taxability under the ITA 2025, one must consider whether a source or a business connection exists in India and the nature of the income. (d) For taxability under the relevant DTAA, the nature of the income and the existence of a PE in India must be considered.

8.2-9. Exemption under Entry 13A v. Entry 13G Particulars

Exemption under Entry 13A

Exemption under Entry 13G

Who is eligible to claim Foreign company exemption?

Foreign company

Which income is eligible Income arising from providing for exemption? capital goods, equipment or tooling to a contract manufacturer

Income arising from storage of components in a warehouse in a customs bonded area and sale thereof to contract manufacturer.

Who should do the con- A company resident in India tract manufacturing?

An Indian company

What should be pro- Specified electronic goods on Specified electronic goods on behalf duced by the contract behalf of foreign company pro- of any foreign company viding capital goods, equipment manufacturer? or tooling Who should have the Ownership of capital goods, Not specified ownership of goods given equipment or tooling should be with the foreign company by foreign company? Who should have the Capital goods, equipment or Not specified control over goods given tooling should be under the control and direction of the conby foreign company? tract manufacturer Who should be located Contract manufacturer should Components and the contract manin the customs-bonded be located in a custom bonded ufacturer should both be located in customs bonded warehouse warehouse area? Period of exemption

Tax years 2026-27 to 2040-41

01-10-2026 to 31-03-2027 and Tax years 2026-27 to 2040-41

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

The table below compares the exemptions available under Entry 13A and Entry 13G of Schedule IV.

8.2-10. Comprehensive illustration A USA foreign company (USA-Co.) hires two Indian contract manufacturers (CM), A and B, to manufacture laptops in a customs-bonded warehouse in India. A South Korean company (Korean-Co.) sets up a warehouse in a customs-bonded warehouse to store and sell LED screens for the laptops. The contract manufacturers work exclusively for the USA-Co. and are considered the dependent agent of the USA-Co. The USA-Co. provides them with all the required components, technology and capital goods to manufacture the laptops. The Korean Co. also sells them the LED screens for the laptops. All laptops they produce are purchased by the USACo. for sale in India and abroad. During the tax year 2026-27, both foreign companies earn the following income: Particulars

CM-A

CM-B

The contract manufacturer operates from the Customs Bond- Yes ed Warehouse

Royalty charged by the USA-Co. from the CM for the supply of Rs. 1 crore assets and apparatus

Rs. 1 crore

Professional fees charged by the USA-Co. from the CM for in- Rs. 2 crores stallation and training services in respect of such assets and apparatus

Rs. 2 crores

Professional fees charged by the USA-Co. from the CM for oth- Rs. 5 crores er services not in respect of such assets and apparatus

Rs. 5 crores

Consideration received by the USA-Co. for the sale of compo- Rs. 6 crores nents to manufacture the laptops

Rs. 7 crores

Consideration received by the Korean-Co. for the sale of com- Rs. 8 crores ponents to manufacture the laptops

Rs. 9 crores

Sale of goods by the USA-Co. manufactured by CM (in India)

Rs. 10 crores

Rs. 15 crores

Sale of goods by the USA-Co. manufactured by CM (outside Rs. 30 crores India)

Rs. 50 crores

The taxability of such sum under the DTAA and the Income-tax Act shall be as follows:

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

Particulars

Amount

Whether Whether Whether Whether taxable in taxable in income is the condiIndia un- India under deemed to tions of EnDTAA? try 13A/13G accrue or arise der the Inin India under come-tax of SchedAct? Section 9? ule IV are fulfilled?

Royalty charged by Rs. 1 crore the USA-Co. from the CM-A for the supply of assets and apparatus

Yes

Royalty charged by Rs. 1 crore the USA-Co. from the CM-B for the supply of assets and apparatus

Professional fees Rs. 2 charged by the crores USA-Co. from the CM-A for installation and training services

Yes

Professional fees Rs. 2 charged by the crores USA-Co. from the CM-B for installation and training services

Professional fees Rs. 5 charged by the crores USA-Co. from the CM-A for other services

Professional fees Rs. 5 charged by the crores USA-Co. from the CM-B for other services

Sale of components Rs. 6 by the USA-Co. to crores CM-A

Yes

Sale of components Rs. 7 by the USA-Co. to crores CM-B

No6

Whether taxable in India in view of Section 159(4) of ITA?

[Schedule IV: Table, Sl. No. 13A] Yes

Yes

[Section 9(6)]

[Section 207]

[Article 12 of the USA DTAA3 ]

[Article 12 of USADTAA]

[Schedule IV: Table, Sl. No. 13A]

Yes

Yes4

[Section 9(7)]

[Section 207]

[Article 12 of the USA DTAA]

[Article 12 of USA DTAA]

Yes

[Section 9(7)]

[Section 207]

[Article 12 of the USA DTAA]

[Article 12 of USA DTAA]

Yes

[Section 9(7)]

[Section 207]

[Article 12 of the USA DTAA]

[Article 12 of USA DTAA]

Yes

[Section 9(2)]

[Schedule IV: Table, Sl. No. 13G]

[Article 7/5 of USA DTAA]5

Yes

[Section 9(2)]

[Section 26]

[Article 7/5 of USA DTAA]7

[Section 26]

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

Whether taxable in India in view of Section 159(4) of ITA?

Sale of components Rs. 8 by the Korean-Co. crores to CM-A

Yes

Sale of components Rs. 9 by the Korean -Co. crores to CM-B

No9

Sale of goods by Rs. 10 the USA-Co. man- crores ufactured by CM-A (in India)

Sale of goods by Rs. 15 the USA-Co. man- crores ufactured by CM-B (in India)

Sale of goods by Rs. 30 the USA-Co. man- crores ufactured by CM-A (outside India)

Sale of goods by Rs. 50 the USA-Co. man- crores ufactured by CM-B (outside India)

Particulars

Amount

Yes

[Section 9(2)]

[Schedule IV: Table, Sl. No. 13G]

[Article 7/5 of Korea DTAA]8

Yes

[Section 9(2)]

[Section 26]

[Article 7/5 of Korea DTAA]10

[Section 26]

Yes

[Section 9(2)]

[Section 26]

[Article 7/5 of USA DTAA]11

[Section 26]

Yes

[Section 9(2)]

[Section 26]

[Article 7/5 of USA DTAA]

[Section 26]

Yes

[Section 9(9)(c) (ii)(A)]12 No [Section 9(9)(c) (ii)(A)]

[Article 7/5 of USA DTAA] No

Yes

[Article 7/5 of USA DTAA]

9. Exemption to unit holders of business trust for dividend received from SPV and consequential impact thereof on taxability of SPV [Schedule V: Table, Sl. No. 5] 9.1. Pre-amended position The taxation of a business trust [Real Estate Investment Trust (REIT) or Infrastructure Investment Trust (InVIT)] and its unit holders is governed by Section 223 (corresponding to Section 115UA of the ITA 1961) read with Schedule V (Table S. Nos. 3, 4 and 5) of the ITA 2025 (corresponding to clauses (23FC), (23FCA) and (23FD) of Section 10 of ITA 1961). These provisions provide a pass-through taxation regime for specified categories of income where-

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

by such income is exempt in the hands of the business trust and is taxed directly in the hands of its unit holders. Conversely, income that is not eligible for pass-through taxation is taxable in the hands of the business trust but is exempt when distributed to the unit holders. One of the categories of income eligible for pass-through taxation is dividend received by a business trust from its Special Purpose Vehicle (SPV). Accordingly, dividend received or receivable by a business trust from the SPV is exempt under Schedule V (Table S. No. 3). Further, where the business trust distributes such dividend to its unit holders, it is also exempt in their hands under Schedule V [Table S. No. 5]. However, clause (b) of Column D of Schedule V [Table S. No. 5] provides that the exemption to unit holders shall not be available where the dividend is received or receivable from an SPV that has exercised the option to be governed by the concessional tax regime under Section 200 (corresponding to Section 115BAA of ITA 1961). Consequently, the taxability of the dividend in the hands of the unit holders depends upon the tax regime adopted by the SPV. If the SPV continues under the regular corporate tax regime, the dividend distributed through the business trust remains exempt in the hands of the unit holders. However, if the SPV exercises the option under Section 200 and shifts to the concessional tax regime, the exemption ceases to be available, and the dividend becomes chargeable to tax in the hands of the unit holders.

9.2. Post-amendment provision The TOLA 2026 has proposed the following two amendments: (a) Dividend will be exempt from tax in the hands of the unitholders even if the SPV opts for the alternate tax regime [see Para 9.2-1.]. (b) The surcharge rate applicable to SPVs opting for the concessional tax regime has been increased [see Para 9.2-2.].

9.2-1. Exemption for dividend to the unitholders irrespective of the tax regime opted for by the SPV TOLA, with effect from 01-04-2026, omits clause (b) appearing in Column D of Schedule V [Table S. No. 5], which denies exemption to unit holders of a business trust in respect of income received or receivable from an SPV that opts for a concessional tax regime under Section 200. Since this clause is proposed to be omitted, the exemption available to the unit holder will no longer depend upon the tax regime chosen by the SPV. Accordingly, dividend received by a business trust from an SPV and distributed to its unit holders will be exempt from tax even where such SPV opts for a concessional tax regime under Section 200. The amendment, therefore, removes the distinction between an SPV continuing under the regular tax regime and an SPV opting for the concessional tax regime under Section 200.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

9.2-2. Increase in surcharge rate applicable to SPVs opting for concessional tax regime TOLA, with effect from 01-04-2026, proposes an amendment to the table in Section 3(4)(b) of the Finance Act, 2026, which provides the surcharge rate. At present, domestic companies opting for the concessional tax regimes under Section 200 or 201 (corresponding to Section 115BAA or Section 115BAB of ITA 1961) are liable to surcharge at the rate of 10% [Sr. No. 9 of the Table to Section 3(4)(b) and Section 3(12)(b) of the Finance Act, 2026]. TOLA 2026 proposes to carve out a separate category for SPVs referred to in Schedule V [Note 2] (corresponding to Explanation to Section 10(23FC) of ITA 1961). Consequently, the existing Sr. No. 9 is proposed to be substituted by Sr. Nos. 9 and 9A, prescribing a surcharge of 25% for SPVs opting for the concessional tax regime under Section 200 or 201, while the surcharge rate of 10% continues to apply to all other domestic companies. Accordingly, the surcharge rates will be as under: Sr. No.

Section

Person

Rate of Surcharge

200 or 201

Domestic company (other than SPV referred to 10% in Schedule V [Note 2])

9A.

200 or 201

Domestic company being SPV referred to in 25% Schedule V [Note 2]

The omission of clause (b) of Column D of Schedule V [Table S. No. 5] enlarges the scope of exemption available to the unit holders. Consequently, dividends that are presently taxable in the hands of the unit holders where the SPV opts for the concessional tax regime will become exempt, resulting in a corresponding loss of revenue to the exchequer. To offset this revenue loss, the TOLA 2026 simultaneously proposes to increase the surcharge applicable to SPVs opting for the concessional tax regime from 10% to 25%.

9.2-3. Objective of the amendment The above amendments are not standalone amendments. They are the consequential amendments necessitated by the rationalisation of the Minimum Alternate Tax (MAT) framework by the Finance Act, 2026 under the ITA 2025. The Finance Act, 2026 made amendments to Section 206 of the ITA 2025 (corresponding to Section 115JAA/115JB of ITA 1961) to treat MAT as a final tax in the old regime prospectively and allowed domestic companies to utilise the MAT credit accumulated under the ITA 1961 upon migration to the concessional tax regime under Section 200 or Section 201, subject to specified conditions. Thus, one of the principal objectives of the MAT reforms is to facilitate and encourage companies to migrate from the regular tax regime to the concessional tax regime. This policy objective is equally relevant for SPVs of business trusts. Since an SPV is also a domestic company, the MAT reforms could induce it to opt for the concessional tax regime under Section 200 in order to utilise its accumulated MAT credit or avoid the continued incidence of MAT under the old regime.

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

However, such migration will give rise to an unintended consequence under the passthrough taxation regime applicable to business trusts. As discussed earlier, exemption in respect of dividend distributed by a business trust is denied where the SPV exercises the option under Section 200. Consequently, although the MAT reforms encourage SPVs to migrate to the concessional tax regime, such migration simultaneously results in the dividend becoming taxable in the hands of the unit holders. Thus, the commercial decision of the SPV to migrate to the concessional tax regime would have an adverse tax consequence for the investors of the business trust. In effect, the tax regime chosen by the SPV will determine whether the unit holder would continue to enjoy exemption on the dividend distributed through the business trust. The Government also recognises this anomaly in the FAQs issued on the TOLA 2026. It states that SPVs may need to migrate to the concessional tax regime either to utilise the accumulated MAT credit or to avoid the continued incidence of MAT under the old regime. However, such migration results in the unit holders losing the exemption available in respect of dividend income. To remove this unintended consequence and provide certainty, the TOLA 2026 proposes to omit clause (b) of Column D of Schedule V [Table S. No. 5], thereby allowing the exemption irrespective of the tax regime adopted by the SPV. The amendment, therefore, is not intended to provide an additional tax benefit to the unit holders. Its objective is to ensure that the MAT reforms achieve their intended purpose without disturbing the pass-through taxation regime applicable to business trusts. At the same time, the TOLA 2026 proposes to increase the surcharge applicable to SPVs opting for the concessional tax regime from 10% to 25% to offset the resulting loss of revenue.

9.2-4. No consequential amendment to TDS provisions A business trust is required to deduct tax at source on payments made to its unit holders in respect of income eligible for pass-through taxation. Tax is required to be deducted under Section 393(1) [Table S No. 4(ii)] where the payment is made to a resident unit holder and under Section 393(2) [Table S Nos. 6 and 7] where the payment is made to a non-resident unit holder. However, since the dividend received by a business trust from an SPV and distributed to its unit holders is exempt from tax in the hands of the unit holders where the SPV has not exercised the concessional tax regime under Section 200, Section 393(4) [Table S. Nos. 5 and 13] provides a corresponding relaxation by exempting the business trust from the obligation to deduct tax at source on such dividend. The TOLA 2026 extends the exemption to the unit holders, irrespective of whether the SPV has exercised the concessional tax regime under Section 200. Consequently, a corresponding amendment should have been made to Section 393(4) [Table S. Nos. 5 and 13] to provide that no tax is required to be deducted at source where dividend received from an SPV is distributed by the business trust to its unit holders, irrespective of the tax regime adopted by the SPV. However, no such consequential amendment has been proposed. As a result, while the substantive exemption has been extended, the corresponding TDS relaxation continues

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

to be linked to the tax regime adopted by the SPV. This appears to be an omission, which ought to be rectified to align the withholding tax provisions with the amended exemption provisions.

9.2-5. Overview The tax implications of the proposed amendments, depending upon the tax regime opted by the SPV, are summarised below: Particulars

SPV continues under regular tax regime Before amendment

After amendment

Surcharge appli- As applicable un- No Change cable to SPV der the regular tax regime Levy of MAT

SPV opts for the concessional tax regime under Section 200

Applicable and No Change treated as final tax where MAT exceeds the normal tax liability

Before amendment

After amendment

10%

25%

Utilisation of Not available MAT credit accumulated under the ITA 1961

No Change

Available and set off MAT credit allowed against the normal tax computed under the concessional regime of Section 200, subject to certain conditions

Exemption to Available business trust on dividend received from SPV

No Change

Available

Exemption to Available unit holders on distribution of such dividend by the business trust

No Change

Not available

Available

Pass-through taxation disrupted because the exemption is denied to the unit holders

Pass-through taxation restored. However, the revenue loss is offset by increasing the surcharge on the SPV to 25%.

Overall impact

Pass-through taxa- No Change tion available

Analysis of the Amendment proposed in the Taxation and Other Laws (Amendments) Bill 2026

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Taxmann's Analysis | TOLA 2026: Key Tax Amendments & Cross-Border Incentives