Govt planning major tax overhaul to boost manufacturing and foreign investment

The Centre is set to table the Taxation and Other Laws (Amendment) Bill, 2026 with a broad package of tax changes. The proposals aim to support manufacturing, foreign investment and strategic sectors through a more predictable framework.

In Short

• Centre plans tax overhaul to boost manufacturing, attract foreign capital
• Taxation and Other Laws (Amendment) Bill, 2026 to be tabled soon
• Tax exemptions for electronics manufacturing extended till FY2040-41

The Centre is preparing a wide-ranging overhaul of India's tax framework aimed at boosting manufacturing, attracting foreign capital and supporting emerging sectors such as electronics manufacturing and digital infrastructure, reported The Economic Times.

The proposed changes are expected to be introduced through the Taxation and Other Laws (Amendment) Bill, 2026, which is likely to be tabled in the Lok Sabha this week.

The Bill seeks to replace the Income Tax Ordinance issued in June and proposes several tax incentives for manufacturers, foreign investors, REITs, InvITs and data centres.

MANUFACTURING TAX BENEFITS MAY BE EXTENDED TILL FY41

According to the report, one of the biggest proposals is to extend tax exemptions for contract manufacturing of specified electronic goods until FY2040-41.

The list is expected to include mobile phones, laptops, tablets, servers, wearables and related electronic components.

The proposal is aimed at giving long-term tax certainty to manufacturers and strengthening India's position as a global electronics manufacturing hub.

The Bill is also expected to provide tax relief to foreign companies storing electronic components in customs bonded warehouses until FY2040-41, a move that could help strengthen electronics supply chains in India.

EASIER TAX RULES FOR FOREIGN INVESTORS

The Economic Times reported that the Bill proposes to relax several tax-related conditions that have been viewed as hurdles by foreign portfolio investors (FPIs) and global fund managers.

These include easing requirements related to:

• Minimum number of investors
• Minimum fund corpus
• Investment diversification
• Restrictions on investments in associate entities

The changes are expected to make India a more attractive destination for global investment funds.

TAX RELIEF FOR SOVEREIGN DEBT INVESTORS

The proposed legislation also seeks to exempt interest income and capital gains earned from government securities held by foreign institutional investors (FIIs) and the Bank for International Settlements.

According to the report, the move is expected to improve the attractiveness of Indian sovereign debt among international investors.

Another significant proposal is the restoration of tax exemption on dividend income received by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

The move is expected to provide relief to investors in these investment vehicles and improve their overall attractiveness.

DATA CENTRES MAY BENEFIT

The Bill also proposes changes aimed at India's growing digital infrastructure sector.

According to the report, tax rules for leased data centres operated by Indian companies are proposed to be relaxed.

The government also plans to remove the requirement for foreign companies procuring data centre services to be specifically notified by the Centre. In addition, the definition of a "specified data centre" would be expanded to include facilities operated by Indian companies, whether owned or leased, subject to prescribed conditions.

The Bill proposes a long-term tax exemption until FY2040-41 for foreign companies involved in rough diamond sales through notified special zones.

The proposed benefit would cover diamond mining companies, sightholders, brokers, aggregators and auction entities.

OTHER KEY PROPOSALS

According to the report, the legislation also proposes:

A higher 25% surcharge for special purpose vehicles (SPVs) opting for the new corporate tax regime, compared with 10% for other domestic companies.

Delinking zero-charge electronic payment provisions from a specific section of the Income Tax Act. Instead, the Centre would be empowered to notify eligible electronic payment modes directly under the Payment and Settlement Systems Act, allowing quicker policy changes.

"Taken together, the amendments reflect an effort to combine economic stability with investment facilitation," Richa Sawhney, Partner – Tax at Grant Thornton, told the Economic Times.

"The measures are designed not only to address immediate challenges arising from global uncertainties, but also to provide a more predictable tax framework for businesses and investors operating in strategic sectors," she said.

- Ends