Why in News?
The Lok Sabha has passed the Taxation and Other Laws (Amendment) Bill, 2026, which replaces the Income-tax (Amendment) Ordinance, 2026 and introduces changes to the Income-tax Act, 2025, Finance Act, 2026, and Payment and Settlement Systems Act, 2007.
The Bill aims to make India a more attractive destination for foreign investment, encourage domestic manufacturing under the Make in India initiative, simplify business-related regulations, and make it easier for companies to operate in India. It also seeks to strengthen the country’s digital payments and financial systems, supporting a more modern and efficient financial ecosystem.
What are the Key Provisions of the Taxation and Other Laws (Amendment) Bill, 2026?
- Boost to Electronics Manufacturing:
The Bill gives a major push to electronics manufacturing in India. Foreign companies that supply machinery or use Indian factories to manufacture electronics on a contract basis can get tax benefits. The tax holiday, which was earlier available for five years, has been extended by another 10 years, up to 2040–41. The eligible products include mobile phones, laptops, servers and wearable devices. - Support for Electronics and Diamond Businesses:
Certain foreign companies in the diamond and electronics sectors will receive tax exemptions. These benefits cover income from activities such as selling rough diamonds and storing electronic components in customs-bonded warehouses. - Tax Relief for FIIs and BIS:
Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) will not have to pay income tax on certain interest income and capital gains earned from government securities. This is intended to make Indian government securities more attractive to foreign investors. - Easier Rules for Foreign Fund Managers:
The Bill makes it easier for foreign fund managers to shift their operations to India without automatically making their overseas investment funds taxable in India. At the same time, safeguards will remain in place to prevent tax avoidance and round-tripping of money. - Simpler Tax Rules for Data Centres:
Foreign cloud service providers will face fewer complicated approval requirements when they use data centres located in India to claim tax benefits. The Bill also allows Indian data centres to operate through leased facilities, instead of requiring direct ownership. This could encourage more investment in India’s data-centre industry. - Tax Benefits for REITs and InvITs:
The Bill brings back tax-free dividend income for investors in REITs and InvITs, making these investment vehicles more attractive. However, the surcharge on the Special Purpose Vehicles (SPVs) associated with business trusts is proposed to increase from 10% to 25%. - Changes to UPI Charges:
The Bill proposes changes to the Payment and Settlement Systems Act, 2007, giving the Central Government the power to allow banks and payment service providers to charge fees on UPI and other notified digital payment methods.At present, such charges are prohibited for notified electronic payment modes. If the government permits it in the future, it could allow the introduction of a Merchant Discount Rate (MDR) on UPI transactions.The idea is to create a more sustainable revenue model for banks, payment service providers and digital-payment companies, while continuing to support India’s rapidly growing digital payments ecosystem.
Significance
- Attracts more foreign investment:
- The Bill makes India more attractive to foreign investors and encourages more global money to flow into the country.
- Supports Make in India:
- By providing tax benefits to electronics manufacturers, it encourages companies to set up production and manufacturing facilities in India.
- Makes India a data-centre hub:
- Easier rules for data centres and cloud companies can help India become a major global centre for data storage and cloud services.
- Attracts global fund managers:
- Simpler tax rules could encourage international investment firms and fund managers to move more of their operations to India.
- Boosts investment in infrastructure and real estate:
- Tax changes related to REITs and InvITs can encourage investors to put more money into India’s real estate and infrastructure projects.
- Makes doing business easier:
- By reducing complicated approvals, simplifying tax rules and providing greater certainty, the Bill aims to create a more business-friendly environment in India.
Real Estate Investment Trusts (REITs) & Infrastructure Investment Trusts (InvITs)
- REITs (Real Estate Investment Trusts):
REITs are investment vehicles that put money into income-generating properties such as office buildings, shopping malls, hotels and commercial complexes. They work somewhat like mutual funds for real estate. Instead of buying and managing a property yourself, you can invest in a REIT and earn returns through income generated by these properties. - InvITs (Infrastructure Investment Trusts):
InvITs work in a similar way, but they invest in infrastructure projects rather than real estate. They collect money from multiple investors and invest it in projects such as highways, power plants, transmission lines and other infrastructure assets. Investors can earn returns from the income generated by these projects. - Regulation:
InvITs are regulated by SEBI under the Infrastructure Investment Trusts Regulations, 2014, which provides a framework for their functioning and protects investor interests.
Merchant Discount Rate (MDR)
Merchant Discount Rate (MDR) — In Simple Words
- MDR is the fee charged to a merchant by a bank or payment service provider when a customer makes a digital payment, such as through a debit/credit card or UPI.
- It is generally calculated as a small percentage of the transaction value.
- Since 2020, MDR has been zero for UPI and RuPay debit card transactions. This was done to encourage people and businesses to adopt digital payments.
Round-Tripping
Round-tripping means taking money from India, sending it abroad, and then bringing the same money back into India disguised as foreign investment.
For example, an Indian entity may secretly transfer money to an overseas tax haven and later bring it back as Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI). This can make domestic money appear to be genuine foreign investment and may be used for tax evasion, money laundering or avoiding financial regulations.
Indian money goes out → is routed through another country → comes back to India as “foreign investment.”
What are the Concerns Associated Taxation and Other Laws (Amendment) Bill, 2026?
- Limited Parliamentary Debate:
The Bill was passed during disruptions in Parliament, with relatively little discussion and debate. This has raised concerns about whether all its provisions received proper parliamentary scrutiny. - Possible Impact on Digital Payments:
Removing the zero-MDR provision could eventually allow charges to be imposed on UPI transactions. If this happens, small shopkeepers, street vendors and low-income users could be affected and may become less willing to use digital payments.
However, supporters argue that the current zero-MDR system may not be financially sustainable in the long run. As UPI usage continues to grow rapidly, banks and payment companies will need stable sources of revenue to maintain and expand the digital payment infrastructure. - Possible Loss of Government Revenue:
Long-term tax exemptions for foreign companies, FIIs and other investors could reduce the government’s tax collections. This may create challenges for the government’s efforts to maintain fiscal discipline and control the budget deficit. - Risk of Round-Tripping:
Easier rules for foreign fund managers could potentially be misused to move Indian money abroad and bring it back as foreign investment. Although the Bill includes safeguards against such practices, there is still a risk of tax avoidance and round-tripping. - Possible Disadvantage for Domestic MSMEs:
Special tax benefits for large foreign companies could give them an advantage over Indian Micro, Small and Medium Enterprises (MSMEs). Smaller domestic businesses may find it difficult to compete with companies that have greater financial resources and access to tax incentives.
Way Forward
- Make Tax Benefits Performance-Based:
Long-term tax benefits should not be given without conditions. They should be linked to clear results such as creating jobs, increasing exports and bringing new technology to India. The government should review these benefits regularly and end them if the expected results are not achieved. - Protect Data and Privacy:
Tax incentives for foreign cloud companies and data centres should be provided along with strong data protection and cybersecurity requirements. This will help India attract investment while ensuring that people’s personal and sensitive data remains safe under the Digital Personal Data Protection (DPDP) Act, 2023. - Strengthen Indian Manufacturing:
Tax incentives should be supported by stronger Production Linked Incentive (PLI) schemes and more funding for research and development (R&D), especially for MSMEs. This can help India build a stronger and more self-reliant electronics supply chain instead of depending heavily on imports. - Prevent Tax Misuse:
Authorities such as SEBI and CBDT should strengthen their monitoring systems and use AI-based tools to identify suspicious transactions and tax evasion. Strict implementation of General Anti-Avoidance Rules (GAAR) can also help prevent tax avoidance, misuse of foreign investment routes and round-tripping of money.
Frequently Asked Questions (FAQs)
1. What is the main aim of the Taxation and Other Laws (Amendment) Bill, 2026?
The Bill aims to attract more foreign investment, boost the Make in India initiative, make it easier to do business in India, strengthen digital infrastructure, and simplify and improve the tax system.
2. Which major laws are changed by the Bill?
The Bill makes changes to the Income-tax Act, 2025, Finance Act, 2026, and Payment and Settlement Systems Act, 2007. It also replaces the Income-tax (Amendment) Ordinance, 2026.
3. How does the Bill promote electronics manufacturing?
The Bill provides and extends tax benefits for eligible foreign companies involved in electronics manufacturing. It also clearly identifies products such as mobile phones, laptops, servers and wearables, helping attract investment and strengthen India’s domestic electronics manufacturing sector.
4. Why are REITs and InvITs important under the Bill?
The Bill restores tax-free dividend benefits for investors in REITs and InvITs. This could make these investment options more attractive and encourage greater private investment in real estate and infrastructure projects.
5. What are the major concerns about the Bill?
Some key concerns are limited parliamentary debate, the possibility of charges being introduced on UPI transactions, reduced government tax revenue because of long-term exemptions, the risk of tax avoidance and round-tripping, and the possibility that domestic MSMEs may face tougher competition from companies receiving special tax benefits.
