Introduction
In the recent past, India has launched various schemes to promote setting up of semiconductors and display manufacturing facilities in India. The objective of the Government is to position India as a global hub for electronic system design and manufacturing. The schemes have provided fiscal support for setting up of facilities in India and also exemption from custom duty for certain category of products.
In the Union Budget 2025, amendment has been proposed under income-tax law to further promote the industry by ensuring tax certainty to non-residents. As part of the amendment, a new presumptive taxation scheme has been proposed for non-residents engaged in providing services or technology in India for setting up electronics manufacturing facility or manufacturing electronic products in India.
In this article, the authors have captured the scope of the new presumptive taxation scheme and the issues which need clarification for the application of the scheme.
New presumptive tax scheme for non-residents
Section 44BBD has been proposed to be added in the Income Tax Act, 1961 (‘Act’) to introduce the new presumptive scheme. The salient features of the scheme are as follows:
1. The provision is applicable to non-residents engaged in the business of providing ‘services’ or ‘technology’ in India, for the purpose of setting up an electronics manufacturing facility or in connection with manufacturing or producing electronic goods, article or thing in India.
2. The recipient should be provided to a resident company which is establishing or operating said electronics manufacturing facility or a connected facility under a Scheme notified by the Central Government. Also, the resident must satisfy the conditions prescribed for the same.
3. Under the scheme, 25% of the aggregate amounts received/ receivable by non-residents (or any person on his behalf) shall be deemed to be the profits liable to tax as business income of non-resident.
4. Set off of unabsorbed depreciation and brought forward business losses will not be allowed.
By application of the presumptive scheme, the service income of non-resident shall get taxed at an effective tax rate of around 9.55% of the gross receipts of non-resident.
In the above proposed provision, there exists certain ambiguities which needs to be addressed for application of the scheme to the intended taxpayers.
New Scheme: Optional or mandatory?
The way the scheme has been worded, it is a mandatory for all non-residents covered under the scheme to pay tax on the deemed income. The non-residents cannot choose to be taxed as per normal provisions of the income tax law.
This is unlike other presumptive tax schemes present under the law where the eligible assessee can choose to be taxed under the normal provisions, such as provisions of Section 44AD applicable in case of business income and Section 44ADA applicable in case of professional income.
Considering that the scheme is mandatory, it will pose difficulty in cases where the non-resident has incurred losses or has earned lesser net income, as they may still have to pay tax under presumptive scheme. In Authors’ view, the non-resident service provider may choose to avail the benefit of tax treaty and pay tax, if any, in accordance with the Article 7 of the tax treaty on a net basis.
Taxation of offshore services
The provision provides for taxation of income received by a non-resident engaged in the business of providing services or technology ‘in India’. A question which needs to be addressed is that whether the non-resident must have physical presence in India for the provision to apply (i.e. onshore activities). Will the presumptive scheme also apply to a non-resident providing the services or technology from outside India to a recipient located in India (i.e. in case of offshore services)?
Considering the plain text of Section 44BBD, it appears that only onshore services which are taxable in India as per the Indian domestic source rule (i.e. Section 9) and as per the tax treaty shall be covered in the ambit of the Section. The phrase ‘in India’ may be intended to keep offshore services outside the ambit of this presumptive scheme. However, suitable clarification may be issued in this regard to avoid confusion. Also, the exact scope of the term ‘in India’ is also required to be defined, as in many cases, the services or technology may be provided partly from outside India and partly in India.
Meaning of ‘services’ and ‘technology’
Under the new scheme, the terms ‘services’ or ‘technology’ have not been defined. The intention as flowing from the memorandum seems to be to cover rendition of technical support services and deployment of technology for setting up of such electronic manufacturing facilities. However, there is no definition provided in the proposed provision.
In absence of any clarification, the ambit of provision is quite wide. It may cover all kinds of services and licensing of technology including fee for technical services. This will result in issues such as multiple taxing provisions being applicable for the same services due to overlapping scope of the provisions. This may be counterproductive and lead to litigation. This has been discussed subsequently in this article.
Claim of deductions under other Sections
In other presumptive tax schemes existing under the law, there lies a specific provision which restricts the claim of further deductions (from Sections 30 to 38 of the Act) from the deemed income. Said provision states that all deductions shall be deemed to have been already given full effect to and no further deduction under those Sections shall be allowed.
In the new scheme, such a provision is absent. Due to the same, an interpretation can be taken that the proposed scheme only prescribes the portion of income which shall be considered as taxable receipt. From said portion of income, the taxpayer is free to claim other deductions as there is nothing which bars the non-resident.
While one may say that the interpretation is not in line with the intent of introducing the new scheme, it is definitely plausible view considering the text of the provisions.
Interplay between Sections 44DA and 44BBD in case of onshore services
Section 44DA of the Act contains special provision for taxation of royalty or fee for technical services (‘FTS’) income of the non-residents. The provision is applicable where the non-resident carries on business in India through a permanent establishment (‘PE’) and the right, property or contract in respect of which the royalties or FTS are paid is effectively connected with such PE. The income under the head ‘profits and gains of business and profession’ is computed after deducting the expenses wholly and exclusively incurred for the business of such PE and reimbursement of actual expenses to the head office.
Now, the question is whether in cases where the services qualify to be of technical nature and is also covered in the scope of Section 44BBD, which provision shall take precedence.
It is a settled legal principle that a specific provision in law overrides a general provision. Applying said principle, one can say that since Section 44BBD is specific to services provided to electronic industry, it shall take precedence over Section 44DA of the Act. Alternatively, it can also be argued that the Section 44DA is specific to FTS and royalty earned from a PE in India, hence, it should take precedence.
In Author’s view, the former view appears to be correct view. This is also in line with the lex posterior rule of interpretation which states that the latter enactment will override the former provision to the extent of contradiction.
Interplay between Sections 44BBD and 115A
Section 115A provides for taxation on dividends, royalty and FTS in case of non-residents (not having PE in India). For FTS and royalties, a tax rate of 20% on gross basis has been provided.
On literal reading of proposed Section 44BBD and existing Section 115A, it is possible that both the Sections can apply together in a situation where non-resident provides services or technology in India without creating a PE. Similarly, overlap can also occur if offshore services are said to be covered under Section 44BBD.
Section 44BBD provides for the portion of gross receipts which shall be deemed to be taxable (without any mention of allowance of any expenses) and Section 115A provides for the rate of tax applicable on gross receipts. Thus, the tax liability that may get computed because of application of these provisions could be significantly different and may result in litigation. A suitable clarification is required in this regard to provide certainty to the non-residents.
Application of Section 44BBD in case of multiple streams of business
It is quite normal for a resident company to enter into a comprehensive contract with the services providers for both onshore and offshore supply of technology and/ or services. In certain cases, separate contracts may be entered for different deliverables. A question which needs to be addressed is whether it shall be open for the non-resident to pay tax on net basis in terms of tax treaty for certain streams of income from a customer or project, while paying tax on presumptive basis for remaining streams of income. For instance, whether the non-resident service provider may want to pay tax on certain services on net basis under Article 7 of tax treaty because of lower profitability, while wanting to pay tax on other services on gross basis under Section 44BBD. This my complicate the applicability of computation provisions under the domestic law.
Conclusion
Introduction of new presumptive tax scheme is definitely aligned with the overall intent of the Government to provide tax certainty to taxpayers. However, as highlighted in the foregoing paragraphs, the scheme contains various loose ends which needs to be tightened up before enactment. In the present form, it may turn out to be counterproductive and lead to a new wave of litigation, which may take years to settle down. Therefore, it is important that the Government fills the gaps by introducing appropriate amendments and clarifications at the inception itself so that the scheme achieves intended objectives.
[The authors are Associate Partner and Principal Associate, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys]
