LAST decade and half haven't been good for the multinationals, at least perception wise. We had a plethora of reports and discussion and research papers, government papers and what have you - all telling us that MNCs indulge in eroding the tax base of the source countries, more particularly of the developing countries. Endless action plans both at the OECD level and at the level of the UN told us of the futility of generous tax incentives culminating in the putting in place of the Pillar 2 which tries to ensure that multinational entities pay a minimum tax of 15% in countries in which they operate. If the source country does not tax, other countries will charge a top up tax so that the overall tax liability would be at least 15%. On ground however, it has never been so good for MNCs, particularly of the digital kind. Barring minor occasional hiccups, the value of these companies and their owners have skyrocketed and most of them are extracting tax concessions, particularly in the USA.

Although India was an enthusiastic participant in the BEPS project, it has not signed up to the Pillar 2 global minimum tax initiative. The official justification of Pillar 2 is to stop the race to the bottom by nations by offering tax incentives for foreign investments by MNCs. On the other hand, India has been on a spree of extending tax incentives, of course in certain areas at least for the time being.

To recap, for the year 2026 alone, we had Budget 2026 providing complete tax exemption to foreign cloud service providers using Indian data centers up to the year 2047. At the same time a 15% cost+ safe harbour was provided to related entities providing data centre services from India. (Rule 89)

That apart, contract manufacturing in the electronic sector was encouraged and foreign companies supplying capital goods, equipment etc. to Indian resident toll manufactures in a bonded warehouse got a 5-year tax exemption up to tax year 2030-31 in respect of any income that could arise from providing capital goods, equipment and tooling to a resident contract manufacturer. At the same time a safe harbour profit margin of 2% of the invoice value was also provided to non-residents supplying capital goods, tooling etc. kept in bonded warehouse.

Subsequently, when the Parliament was not in session between the budget session and the monsoon session, perhaps to deal with the worsening foreign exchange situation and to arrest the precipitous fall of the rupee, the government introduced an Ordinance to exempt FIIs investing in Government securities of 15, 30, 40 years tenure and sovereign green bonds from interest and capital gains taxation in India. Same exemptions were also accorded to the Bank of International Settlement.

As a result, after the ordinance, the total count of exemptions to foreign companies and non-residents as given in schedule IV stood at 18 with item no 13D (exemption to FIIS) and item no 13E (exemption to BIS) being newly added. As will be discussed below two more have now been added- 13F and 13G.

Under Article 123 of the Constitution, an Ordinance has the same effect as an Act of the Parliament but such an Ordinance has to be laid before both Houses and ceases to operate at the expiration of six weeks from the reassembly of Parliament. Accordingly, in the monsoon session of Parliament, the provisions of the Ordinance were taken up. In the event, not only the provisions of the Ordinance giving special relief to non-residents were confirmed but some more benefits have also been given. Also interesting to note that (though not discussed here) not only the taxation laws but changes in the digital payment infrastructure through amendment in the Payment and Settlement Act, 2007 was also amended through the new legislation to replace the Ordinance.

Let us then examine the provisions of the Taxation and Other Laws (Amendment) Act, 2026 (TOLA) that was passed in the lower House without any discussion through a voice vote and was also passed in the Rajya Sabha on the 10th of August 2026 where the Finance Minister in her reply explained some of the provisions and the rationale of the amendments. The Bill finally received the assent of the President on the 17th of August, 2026.

The Amendment Bill obviously confirms what was proposed in the Ordinance that is to exempt FIIs and BIS from their Indian income of interest and capital gains from Government Securities. We had earlier discussed these amendments. But apart from confirming these two, the Bill also introduced further new incentives for foreign investors besides further liberalizing some of the ones already granted through the Finance Act 2026. There are in fact six new amendments in the Income Tax Act and we intend to discuss these in two parts.

Contract manufacturing in the electronic sector:

The concession granted to contract manufacturing in the budget 2026 in electronic sector was as follows

13A

Thus, the changes that are now made are that the exemption is extended for another 10 years to tax year 2040-41. Besides, the electronics goods that the government wants to encourage are now specified through a new Note 2A to Schedule IV as follows

Note 2A:  For the purposes of Sl. No. 13A, the expression "specified electronic goods" means -

The Finance Minister in her reply in the Rajya Sabha has, in fact elaborated on the provisions of TOLA although this has neither been reported widely nor is available on the Ministry's website and had to be culled out from the YouTube version of the Sansad TV. Elaborating on this exemption, the FM, inter-alia stated:

"Take an example, Sir of some kind of a commodity which is being produced but when producing that they need certain tools or equipments to produce that. Those tools and equipments are not manufactured in this country but they need that here. They may bring it here, use it here and once the production is over it may go back or it may be left behind because they are specifically made and designed for the production of these kinds of tools.

So, for them [is] the exemption (…) from tax for those equipments which are uniquely for the manufacturer of certain things that are produced in this country. So, (…) that with some conditions we are allowing that exemption. [the conditions-] I I will just say one or two conditions which have to be satisfied for becoming eligible for (those) [that] exemption= is the ownership of such capital goods or equipment or tools remains with the foreign company. It cannot be transferred to the local company. Such capital goods and equipment or tools is under the control and the direction of the contract manufacturer who's manufacturing in this country. Third, the contract manufacturer should be (a) company resident in India and located in a custom bonded area. And finally, the contract manufacturer produces electronic goods on behalf of a foreign company for a consideration. If he fulfils these (…) conditions, (they) [he] will be eligible for the tax exemption for those tools, for those machines which come uniquely for manufacturing those items."

Interestingly, the FM also stated the expectations of the government for allowing these incentives and it is necessary to note the same and at some point, examine whether those objectives have indeed been met. About this amendment, the FM stated:

"So, what would this do? For instance, Sir, some of the items are laptops, all-in-one personal computers and tablets, servers, ultra small form factor- USFF as they say, sub-assemblies to the finished goods and so on. So, this is aimed at getting larger ecosystem to come into the country so that a specific manufacturing which is now giving good results for India can now get the entire ecosystem to India so that (…) the process of manufacturing is not a one-off item. So, many other investments will come for providing additional support to that ecosystem itself and create employment, bring in newer investments and so on. So, a larger ecosystem for enabling contract manufacturing for - not limited to- for mobile phones- laptops, personal computers, servers and related equipments which can be done in India."

A new item of exemption for foreign companies has been introduced also for the electronic manufacturing sector for storing components.

13G (New)

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.

In her intervention in the Rajya Sabha, the FM elaborated on this amendment as follows:

"Sir, fourth amendment which we are bringing here, - exemption to a foreign company storing components for sale to a contract manufacturer involved in manufacturing of specified electronics goods. Sir, I just want to elaborate on this. Assume that there is a phone manufacturer. There are several thousands of little, little parts which go into making that phone. Each time he wants a particular component, he will have to place an order, wait for the component to be brought in, then supply, then make it. But making of these items which are very export sensitive required timely supply of these components. There is no way in which you can expedite the supply if you have to each time import it. So, among the industry, the idea was if there was- unless they are keeping it in a ship in the high seas- instead of that, they could hold it within our borders somewhere close to the port, not as a [an] ownership. It's in the ship or here, but immediately supplied to that particular notified manufacturer that particular component, and whatever tax has to be paid will be paid. Therefore, foreign companies were provided a safe harbour till now at the rate of 2% or more of the gross receipts from the business activity of storage of components in a warehouse in a customs bonded area. So, the framework is part of rule 99 to 102 of the Income Tax rules 2026, applies where such components are sold to a contract manufacturer. (specified fellow) of specified electronic goods"¹

"So, what is the outcome we are expecting out of this. (The) amendment is expected to enable a much larger ecosystem for contract manufacturing of mobile phones, laptops, personal computers, servers and related components in India."

Data Centre Services

The Government seems to be betting big on data centres which are the backbone for artificial intelligence even if Americans (as distinct from the American Administration) are turning away from such centres. In fact, more than 70% of Americans are reportedly turning against data centres (Gallup Poll) because of noise and other pollutions and other environmental concerns, limited opportunities of job creatin etc.²

As for India, Budget 2026 had already extended incentives to data centres. This Amendment bill further relaxes some of the conditions as follows:

13C

Specified data centre was defined in Note 3 as follows:

Thus, the exemption conditions as passed by the Finance Act 2026 stands modified to the extent that the condition relating to a separate notification by the Central government of the foreign company availing the exemption is dispensed with. Similarly, the specified data centre also need not be notified by the Ministry of Electronics.

Besides, the data centres can now be operated on a lease basis also. The FAQ put out by the Ministry states that since both the foreign company and the data centre will be required to furnish in a form and manner as may be prescribed in the rules, separate notification will not be necessary.

As for the extension of the lease model of ownership of specified data centre to be operated by Indian company, it has been stated that the same was done on the basis of representation that the condition of the specified data centre being owned and operated by the Indian company was restrictive in that Indian data centre may be operated by an Indian company after it has been procured on lease basis.

FM's reply

The gist of the FM's intervention here is that these are big-ticket long-term investments that has to be provided with some amount of long-term certainty. More important is her rationale for the amendment. Here the FM stated:

"What is the outcome that we expecting by bringing [this amendment]? …{The] outcome that I'm expecting is to provide ease of doing business for companies providing cloud services by way of procuring data centre services in India. The amendment is also expected to enable much larger ecosystem again of Indian data centres providing data centre services to a foreign company. The reform will enable AI data cities in India and is expected to bring in significant investments for AI data cities in India.

Sir, I want to (…) add beyond the language of the Act itself which I've partly narrated that there is an apprehension that this is only for foreign companies. These kind(s) of exemptions are not going to be available for Indian companies which is not true at all. Sir, I want to explain how this will enable sir current data centres to expand their footprints and services for foreign cloud service providers.

There are foreign cloud service providers but there are very many Indian companies providing services to them. They also get covered. This will have the impact of large-scale expansion and setting up of hyperscale data centres in India. Also, the investments, the assets. This is a very critical and important point sir. The investment, the assets, the employment and also the profits which will rest with Indian companies on account of data centre reforms.

I repeat that line sir. The investment, the assets, the employment and also the profit will rest with Indian companies on account of the data centre reforms. Another point sir, the reseller entity of this foreign cloud service provider will also be an Indian entity. These taxes shall also come to India back again and will expand the reseller echo system.

The exemption to the foreign cloud service provider is given till 2047 because data centre is a long gestation asset and long working life. Investor makes heavy investment and in turn seeks certainty of tax treatment. So, it is not just for foreign companies in fact the Indian company ecosystem can expand because of this (…) exemption(s) that we are giving."³

The other new amendments in TOLA affecting international taxation relate to incentives to encourage trading in India of rough diamonds, incentive for relocation of fund managers in India. That apart there is some change in the regime of taxation of dividends from an SPV of business trust in the new regime. We intend to discuss these in detail in the next episode.

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¹ https://www.youtube.com/watch?v=L3vL1QKdLH0

² https://www.forbes.com/sites/jamesbroughel/2026/05/20/why-americans-are-turning-against-data-centers/

³ Minister's reply-The Taxation and Other Laws (Amendment) Bill, 2026-Sansad TV- https://www.youtube.com/watch?v=L3vL1QKdLH0&t=1626s