Jimit Devani, Sannidhi Shah & Anushree Damle – [2025] 180 taxmann.com 861 (Article)
NITI Ayog, the policy think tank of the government, recently released a working paper that seeks to address issues related to taxation of foreign enterprises, with a framework to project India as a simplified tax regime that has the ability to attract high quality foreign investment – a mainstay of the overall objective to become a developed economy by 2047.
The NITI Aayog’s Consultative Group on Tax Policy’s inaugural working paper ‘Enhancing Certainty, Transparency, and Uniformity in Permanent Establishment and Profit Attribution for Foreign Investors in India’ focuses on two of the most debated areas in international taxation — Permanent Establishment (PE) and profit attribution. NITI Aayog emphasizes the need to simplify and streamline India’s tax framework, especially in light of evolving legal interpretations. Recent Supreme Court rulings, such as Formula One World Championship Ltd. v. CIT and Hyatt International (Southwest Asia) Ltd. vs. ACIT, have expanded the scope of PE and clarified how profits should be attributed to Indian operations. These developments, along with the complexities of attribution and the lingering impact of retrospective taxation back the need for tax reforms. The key proposals in the report are discussed below:
The Game-Changer – Presumptive Taxation
The proposed presumptive taxation scheme is a standout reform. It allows foreign companies to opt for a simplified tax regime based on sector-specific deemed profit margins applied to gross receipts from India. This optional mechanism eliminates the need for PE determination and complex profit attribution, offering a safe harbour for compliant taxpayers.
To simplify compliance, the scheme suggests indicative margins such as:
- 10% for infrastructure, EPC, engineering, and oilfield services
- 5% for offshore supply
- 15% for marketing and distribution support
- 20% for consulting, management, and software services
- 30% for digital and e-commerce platforms
To support its objective of reducing litigation and enhancing certainty, the scheme offers:
- Optional participation with opt-out provisions (with documentation)
- Carve-out from other provisions of Indian Tax Legislations to avoid overlapping taxation
- Multi-year lock-in safeguards to prevent misuse
- Alignment with treaty obligations and potential negotiation with key treaty partners
- Administrative simplicity and reduced compliance burden, thereby promoting predictability.
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