SYLLABUS

GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Context: The Taxation and Other Laws (Amendment) Bill, 2026, passed by the Lok Sabha, seeks to amend the Payment and Settlement Systems Act, 2007, Income-tax Act, 2025, and Finance Act, 2026 to promote investment, manufacturing and tax certainty.

Key Provisions of the Bill

• Exemption for Foreign Investors in Government Securities: The Bill exempts Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) from tax on interest income and capital gains from Indian government securities, applicable to income arising from April 1, 2026.

• Tax Incentives for Electronics Manufacturing: The tax exemption for foreign companies supplying capital goods, equipment or tooling to Indian contract manufacturers of specified electronic goods is extended from 2030–31 to 2040–41. 

• It also provides exemption for eligible foreign companies storing components in customs-bonded warehouses for supply to contract manufacturers, covering products such as phones, laptops, tablets and servers.

• Tax Incentives for the Diamond Industry: The Bill provides tax exemption until March 31, 2041 on income from the sale of rough diamonds through notified special zones for eligible foreign diamond mining companies, sightholders, brokers, aggregators and tender or auction entities.

• Tax Rationalisation for REITs and InvITs: The Bill restores the exemption on eligible dividend income received by REIT and InvIT unit holders, irrespective of whether the underlying SPV has opted for the concessional corporate tax regime. 

• It also raises the surcharge on such SPVs from 10% to 25%.

• Simplification of Rules for Offshore Investment Funds: The Bill removes several conditions for eligible investment funds registered outside India but managed from India, including requirements relating to 25 members, 10% investor participation, ₹100 crore minimum monthly average corpus and 25% investment in a single entity.

• Flexibility in the Zero-MDR Framework: The Bill amends the Payment and Settlement Systems Act, 2007 to empower the Central Government to notify the electronic payment modes or transactions that will remain free from charges, including specified UPI and RuPay transactions. 

• It does not itself impose UPI charges; any future MDR would be subject to government notification and may be threshold-based.

• Tax Certainty for Data Centres: The Bill removes certain notification requirements for tax exemptions related to services procured from Indian data centres and extends the exemption to data centres leased and operated by Indian companies. 

• This provides greater flexibility for foreign cloud companies using Indian data-centre infrastructure.

Need and Significance

• Attract Foreign Investment: Tax exemptions for FIIs and BIS on government securities can make Indian government securities more attractive to foreign investors. 

• Strengthen Electronics Manufacturing: Longer tax incentives can attract global companies, strengthen domestic electronics manufacturing and improve India’s integration with global supply chains. 

• Provide Tax Certainty: The REIT and InvIT amendment removes the dividend tax anomaly and ensures uniform tax treatment for eligible investors, irrespective of the SPV’s tax regime. 

• Promote Fund Management: Simplified conditions for offshore investment funds can encourage global fund-management activities to be carried out from India. 

• Support Digital Payments: Greater flexibility in the zero-MDR framework can help ensure the long-term sustainability, affordability and expansion of India’s digital payments ecosystem. 

• Support Emerging Sectors: Tax incentives for the diamond trade and simplified rules for data centres can strengthen emerging sectors, attract investment and improve the ease of doing business.