India Budget 2025: Impact on foreign investors and multinationals

Publication
February 03, 2025

In brief

What happened?

On February 1, the Indian finance minister presented the Union Budget for 2025–26 (Budget 2025). The budget focuses on various development measures that include boosting manufacturing and ‘Make in India,’ enabling employment-led development, investing in people, the economy, and innovation, securing energy supplies, promoting exports, and nurturing innovation.

On the tax front, the big news is the proposed introduction of a new and simplified tax law, a draft of which is expected to be released soon. No announcements have been made on the introduction of Pillar Two rules in response to global tax reforms.

Why is it relevant?

The theme of the tax announcements continues to be tax simplification, stability, and certainty, coupled with reduced compliance burden and ease of doing business. The India budget proposals, after due debate and discussions in Parliament, will be legislated and become law with effect from April 1, 2025, or from other relevant dates for specific proposals.

Action to consider

Companies should evaluate the proposals and their impact on planning and undertaking business affairs in India. Companies also should keep an eye on the new tax code that is likely to be unveiled in the next few days to understand its impact on their business operations in India.

In detail

No change in the tax rate for foreign or Indian companies

There is no change in the headline income tax rate for foreign and Indian companies.

Increase in customs duty rates and customs tariffs

Customs duty rates are increased on many items. The theme is to award duty concessions on the import of capital goods and raw materials meant for manufacturing in India, and to introduce duty hikes on the import of finished goods. Seven tariff rates are eliminated to simplify the customs rate structure.

Presumptive tax regime for non-residents providing services or technology to Indian companies

To promote the government’s vision of becoming a global hub for semiconductor design, manufacturing, and technology development, a presumptive tax regime is proposed to be introduced for non-residents providing services or technology in India to resident companies for setting up an electronic manufacturing facility. Under that proposal 25% of the gross receipts will be chargeable to tax, making the effective tax payable of less than 10%.

Frequently Asked Questions (FAQs) further clarify that the provision of technical personnel also will be eligible for the regime. Announcements also indicate that a safe harbor will be provided for non-residents who store components in India for supply to specified electronics manufacturing units. Further details are still to come.

Extension of tax holiday for start-ups

To boost the start-up ecosystem in India, a tax holiday will be available if eligible start-ups are incorporated before April 1, 2030. Currently, the tax holiday is available for start-ups incorporated until April 1, 2025.

Reporting of Virtual Digital Assets (VDAs)

Effective April 1, 2026, with the objective of monitoring transactions involving VDAs, it is proposed that a prescribed reporting entity must furnish information regarding a transaction in a crypto-asset in a required statement within specified timelines. A separate notification is expected to be issued with further details.

Tax losses in case of mergers

For any merger (i.e., amalgamation) or business re-organization effected on or after April 1, 2025, tax losses of the amalgamating company will be allowed to be carried forward and set off to the amalgamated company for only eight years from the year in which the amalgamating company incurred such losses.

Timelines for filing updated tax return is extended

To encourage voluntary compliance, the time limit to file an updated tax return is extended from 24 months to 48 months, with additional tax payments.

Exemption from deemed dividend to Global Treasury Centers (GTCs) in International Financial Services Centre (IFSC)

Effective April 1, 2025, exemption is provided to advances and loans between GTCs in the IFSC and other group entities of listed foreign parents or the principal entity from the purview of ‘deemed dividend.’

Extension of sunset dates prescribed in various Indian laws to provide tax incentives to the IFSC units

The sunset clauses in various Indian laws for the commencement of operations of the IFSC units are proposed to be extended to March 31, 2030. This is relevant to provide tax incentives to businesses commencing operations in the IFSC.

Block audits for Transfer Pricing (TP)

The concept of block TP audits for a period of three years is proposed to permit multi-year arm’s-length price determination, at the option of the taxpayer.

Expansion in the scope of Safe Harbor Rules (SHR)

An announcement indicates expanding the scope of the current SHR in TP. Details of the proposal are still awaited.

Tax Collection at Source (TCS) abolished on sale of goods

With effect from April 1, 2025, TCS on the sale of goods is proposed to be abolished. Going forward, only withholding tax on the purchase of goods (subject to conditions) is applicable.