Niti Aayog proposes presumptive  taxation for foreign companies

Niti Aayog, the government's policy think tank, on Friday proposed a simplified and optional presumptive taxation scheme for foreign companies to enhance tax certainty and simplify compliance. 

In a working paper, the Aayog highlighted that the optional scheme would address disputes over permanent establishment (PE), streamline compliance and safeguard revenue.

The paper described the scheme as a practical solution to longstanding tax issues, balancing India's taxation rights with the need to provide clarity for foreign investors. It noted that ambiguous PE regulations create uncertainty, deterring foreign direct investment (FDI) despite India's strong economic appeal.

The proposed scheme would allow foreign companies to declare income at a prescribed rate, exempting them from maintaining detailed books for tax audits. The paper suggested sector-specific deemed profit rates and a "safe harbour" provision, ensuring tax authorities do not separately challenge PE existence for opted-in activities. Companies could opt out and file regular returns if actual profits are lower than the presumptive rate.

To align with global norms, the paper recommended codifying PE and profit attribution principles in domestic law, avoiding retrospective amendments. It also urged training tax officers to ensure consistent application of rules, particularly for complex digital and cross-border cases.

Releasing the paper, Niti Aayog CEO BVR Subrahmanyam emphasised that a stable and predictable tax regime is vital for investment and economic growth. He linked the reform to India's vision of becoming a developed nation (Viksit Bharat) by 2047, which requires rapid growth, job creation, and a conducive business environment. "Under the Prime Minister’s guidance, reforms are accelerating across the economy," Subrahmanyam added.