India Seeks Uniform Tax Norms
NITI Targets PE Rule Simplification
Presumptive Tax Scheme Proposed
New Delhi, 03-10-2025 — In a bid to streamline India’s tax landscape and attract more foreign direct investment, the latest NITI Aayog policy paper focuses on enhancing certainty, transparency, and uniformity in Permanent Establishment (PE) and profit attribution rules for foreign investors.
Released by NITI Aayog’s Consultative Group on Tax Policy (CGTP) here today, the 33-page inaugural Tax Policy Working Paper Series, titled Enhancing Certainty, Transparency, and Uniformity in Permanent Establishment and Profit Attribution for Foreign Investors in India, proposes targeted reforms to simplify compliance, cut litigation, and align with global standards, supporting the government’s Viksit Bharat@2047 economic ambitions.
The core focus addresses ambiguities in PE regulations, which determine when foreign companies have a taxable presence in India. Under Section 9 of the Income Tax Act and Double Taxation Avoidance Agreements (DTAAs), PE encompasses fixed places of business, service PEs, construction PEs, and dependent agent PEs.
The paper highlights the 2021 introduction of Significant Economic Presence (SEP) to tax digital activities of non-residents with substantial Indian revenue or user engagement. It argues that while these rules protect India’s tax base, inconsistent applications have led to disputes, increasing costs and deterring investors, as evidenced by cases like Vodafone’s retrospective taxation.
Building on this, the report traces the historical evolution of PE laws from pre-1961 “business connection” concepts to contemporary judicial interpretations. Key cases discussed include the 2005 Motorola ruling on dependent agents, the 2007 Morgan Stanley decision emphasising arm’s length pricing (ALP), and the 2025 Hyatt International case, which stressed economic substance over form. The paper notes that such developments have refined the framework but also contributed to uncertainty without clear legislative guidelines.
Profit attribution, another key area, has shifted from arbitrary allocations (e.g., 50-80% of global profits) to a “separate entity” model, taxing only profits attributable to Indian operations. The report references the Central Board of Direct Taxes (CBDT) 2019 draft, which suggested a three-factor apportionment formula—sales, employees, and assets—with an additional user factor for digital businesses. However, the absence of statutory implementation has resulted in varied, case-specific assessments, exacerbating disputes.
The paper evaluates the broader impact on foreign direct investment (FDI), noting India’s annual inflows of $70-80 billion, which, despite growth, fall short of competitors due to tax unpredictability. Prolonged litigation, often lasting more than a decade, imposes risk premiums and discourages multinational expansions.
Drawing comparisons with global practices, such as Singapore’s streamlined regimes and the Organisation for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) actions, including Pillars One and Two, the report argues that clear PE rules could elevate India’s Ease of Doing Business ranking and attract more investment.
A key recommendation is an optional presumptive taxation scheme, expanding on Section 44BBC of the Income Tax Act (6% of turnover for digital services) and Section 44BBD of the Income Tax Act (0.5% for e-commerce). (Section 44BBD – Special provision for computing profits and gains of the business of providing services or facilities in connection with, or supplying plant and machinery on hire, used in the prospecting for, or extraction or production of, mineral oils. This section allows non-residents engaged in such businesses to compute income on a presumptive basis rather than through detailed accounting. Section 44BBC – Special provision for computing profits and gains of the business of operation of aircraft in India by non-residents. It provides a presumptive taxation framework for foreign companies operating aircraft in India, simplifying the tax compliance process.)
This voluntary framework proposes industry-specific rates, such as 10-15% for manufacturing or 5-8% for services, incorporating anti-abuse safeguards to curb base erosion. The scheme aims to provide taxpayers with simplicity while maintaining revenue neutrality, enabling authorities to prioritise high-risk cases, such as profit shifting. The paper cites international successes, such as Singapore’s 15% rate for select sectors, to support the case for predictability.
Further proposals include legislative definitions for PE and SEP thresholds, improved advance rulings, Mutual Agreement Procedures (MAP), and Advance Pricing Agreements (APAs) for efficient dispute resolution. The report suggests that the Ministry of Finance establish a working group to draft provisions for the upcoming Finance Bill, involving consultations with industry bodies, tax professionals, and treaty partners. It acknowledges potential challenges, including treaty overrides and digital taxation complexities, advocating for balanced reforms that safeguard India’s interests without impeding investment.
The paper also delves into implementation considerations, stressing alignment with global standards like BEPS Pillar Two’s 15% minimum tax and India’s treaty obligations. It addresses stakeholder concerns regarding enforcement uniformity and tax authority capacity, recommending capacity-building and digital tools to strengthen administration. The document warns against perceptions of aggressive taxation, as in past retrospective cases, and emphasises that a transparent regime could enhance India’s global image and voluntary compliance.
Authored by Dr Pushpinder Singh Puniha (Distinguished Fellow, NITI Aayog) and CGTP members Sanjeet Singh (Programme Director), Shilpa Ahuja (Consultant), Pulkit Tyagi, and Kushagra Tripathi (Young Professionals), the report acknowledges inputs from Lakshmikumaran & Sridharan (Karanjot Singh Khurana, Harshit Khurana, Loveena Manaktala) and Ernst & Young (Ganesh Raj, Shalini Mathur), as well as other stakeholders. NITI Aayog CEO BVR Subrahmanyam, in the foreword, highlights the consultative process as vital for creating a responsive tax administration that drives growth.
The release underscores NITI Aayog’s commitment to collaborative governance, with the CGTP prioritising tax simplification to support FDI. Although the paper lacks details on immediate government actions, it advocates for prompt implementation to build on foundations like the 2019 CBDT draft. If enacted, these reforms could position India as a more attractive investment hub, contingent on robust stakeholder involvement and international coordination.
– global bihari bureau
