India is reportedly considering a revamp of its tax structure for multinational corporations (MNCs) with business operations in the country. The potential changes include a revised permanent establishment (PE) tax framework and a formula-based approach to profit attribution.
The primary goal of this initiative is to protect India's taxing rights, provide greater clarity to MNCs and digital firms, and reduce the number of long-standing tax disputes. By clarifying the rules and offering a more transparent framework, the government aims to foster a more predictable and stable business environment for foreign companies operating in India.
One key aspect under consideration is the formula-based profit attribution method. This approach would likely involve assigning weights to various factors such as domestic sales, employee strength, assets, and user base in India to determine the portion of a multinational corporation's global profits that are taxable in India. Such a formula aims to reflect the actual economic activity and value creation occurring within India.
These potential changes are occurring against the backdrop of India's participation in the OECD's global minimum tax initiative, which seeks to establish a minimum 15% tax rate for large multinational corporations. This global initiative aims to address concerns about base erosion and profit shifting (BEPS), where companies exploit tax havens and low-tax jurisdictions to minimize their tax liabilities. By joining the OECD's framework, India is transitioning from unilateral measures, like the Equalisation Levy, towards a globally coordinated system. This shift has implications for how Indian MNCs are taxed abroad and how foreign companies are taxed within India.
The government's perspective is that joining the global minimum tax framework could bring both opportunities and challenges. India could potentially claim additional taxes from its MNCs operating in low-tax jurisdictions, boosting revenue without raising domestic tax rates. However, India might need to phase out its existing unilateral digital tax measures, which could lead to a short-term dip in revenue, though long-term stability is expected to follow.
For Indian MNCs, adapting to the global minimum tax framework means stricter compliance, reduced tax arbitrage, and a more level global playing field. Companies may need to reassess their global subsidiaries and profit allocation models to comply with the new rules, invest in technology for accurate reporting and risk assessment, and prepare for potential changes in India's domestic tax laws as the OECD framework evolves.
The success of the global minimum tax initiative depends on consistent adoption across countries. If major economies opt out or delay implementation, loopholes may persist. Tax authorities will also need new systems and expertise to handle complex reporting and compliance checks. The revised tax framework is expected to offer clarity to MNCs, reduce tax disputes, and protect India's taxing rights.
Furthermore, the government has been actively working on simplifying and modernizing the broader tax landscape. Key reforms, such as the Goods and Services Tax (GST) and lower corporate taxes, have aimed to unify the market, reduce costs, and simplify compliance. In 2019, India reduced corporate tax rates to 22% for domestic companies and 15% for new manufacturing ventures, making the country a competitive destination for global businesses.
The Income Tax Department is also gearing up for the implementation of a new direct tax law from April 1, 2026, which will replace the old Income-tax Act. The Central Board of Direct Taxes (CBDT) is undertaking training and capacity building to ensure a smooth transition to the new rules.
