The Taxation and Other Laws (Amendment) Bill, 2026

Syllabus: GS2/ Polity and Governance, GS3/ Economy

Context

• The Union Government has introduced the Taxation and Other Laws (Amendment) Bill, 2026 in the Lok Sabha to promote Ease of Doing Business, attract Foreign Direct Investment (FDI) and enhance India’s attractiveness as a global investment destination.
  • The Bill will amend the Payment and Settlement Systems Act, 2007, Income-tax Act, 2025, and the Finance Act, 2026. 

Key Provisions of the Bill

• Exemption on income from government securities: The Bill exempts foreign institutional investors (FIIs) and the Bank for International Settlements (BIS) from paying income tax on:
  • Interest earned on investments in government securities, and capital gains arising from sale, exchange or transfer of such securities. 
  •  Previously, under the Income Tax Act, interest income was taxed at 20%, short-term capital gains at 30%, and long-term capital gains at 12.5%. 
• Tax Exemptions for Foreign Companies: Income from sale of rough diamonds in a notified special zone will be exempt. This will apply to foreign companies engaged in diamond mining or sightholders of such companies, and broker, aggregator, or a tender and auction entity connected with sale of rough diamonds.  
• Electronics Manufacturing: Income from storing electronic components in warehouses located in Customs Bonded Areas, provided these components are supplied to Indian contract manufacturers.
  • Eligible products include mobile phones, laptops, servers, and their sub-assemblies/components.
  • Income from supplying capital goods, machinery, equipment, or tooling to Indian contract manufacturers of specified electronic goods will also remain exempt from income tax.
• Investment funds registered outside India but managed from India: The Income-tax Act specifies conditions for tax treatment of eligible investment funds registered outside India but managed from India.
  • If these are met, the fund is not treated as having a business connection in India and does not become taxable in India for that reason. 
  • The Bill removes several conditions including; a minimum of 25 members, maximum 10% participation interest of a single investor, minimum monthly average corpus requirement of Rs 100 crore, and bar on investing more than 25% of the corpus in a single entity.
• Special purpose vehicles of business trusts:  The Finance Act, 2026 levies a surcharge of 10% on income-tax payable by every domestic company opting for concessional tax rates.
  • The Bill raises the surcharge rate to 25% for a special purpose vehicle of a business trust.  
  • Business trusts (e.g. REITs and InvITs) pool money from investors to buy and manage assets. The Bill also exempts unit holders of a business trust from tax on the income representing dividends from such a special purpose vehicle.
• Data centres:  The Income-tax Act exempts income of specified foreign companies arising by way of procuring services from specified data centres. The Bill removes the conditions that; the foreign company be notified by the central government, and the data centre be set up under an approved scheme and be notified in this regard.
  • Under the Act, exemption is available for services procured from a data centre owned and operated by an Indian company.  
  • The Bill extends the exemption to data centres leased and operated by an Indian company.
• Digital Payments: The Bill proposes to remove the existing zero-Merchant Discount Rate (MDR) provision under Section 10A of the Payment and Settlement Systems Act, 2007.
  • Merchant Discount Rate (MDR) is a fee charged to merchants by banks or payment service providers for processing digital payment transactions.
  • It is generally calculated as a small percentage of the transaction value.
  • The MDR is shared among banks, payment service providers (PSPs), payment gateways, and card networks.

Significance of the Bill

• Improves India’s Ease of Doing Business by enhancing policy certainty for global investors.
• Attracts higher Foreign Direct Investment (FDI).
• Promotes electronics manufacturing and digital infrastructure.
• Encourages establishment of global investment management operations in India.
• Boosts investment in infrastructure and real estate.
• Generates employment in high-value sectors.

Challenges

• Tax incentives may reduce government revenue in the short term.
• Effective safeguards are needed to prevent tax avoidance and round-tripping.
• Limited progress in infrastructure, logistics, contract enforcement, and regulatory efficiency can reduce the effectiveness of the proposed tax reforms.

Source: MINT, PRS