India plans new tax rules for foreign firms to minimize litigation: report

India is planning to soon roll out a framework on taxing foreign companies’ profits earned in India in a bid to reduce litigation, Mint reported on Tuesday, citing two people familiar of the development

An expert committee of the Central Board of Direct Taxes (CBDT) had outlined the broad principles of the new rules in a report in 2019.

The new rules come against the backdrop of the US last month pulling out of a global tax deal brokered by the Paris-based Organisation for Economic Co-operation and Development (OECD).

Last month, US President Donald Trump declared the global corporate minimum tax deal “has no force or effect” in the US, effectively removing his country from it.

After years of stalled dialogue on global tax issues hosted by OECD, a global deal to ensure big firms pay a minimum tax rate of 15% was sealed in 2021.

The two-part tax deal seeks to end competitive reductions in corporate tax rates globally and made it harder for highly profitable multinational firms to skirt taxation.

India, which is party to the second part in the deal, will assess how the arrangement can work when major technological companies based in the US do not have to honor it, finance secretary Tuhin Kanta Pandey told Reuters earlier this month.

Delhi has long lodged its reservations against the first pillar of the deal and Pandey said those issues have not been addressed. Key concerns included the subjection of tax-related disputes to international arbitration and the treatment of withholding tax under the “Pillar 1” arrangement.

The new rules are framed under Section 9 of the Income Tax Act and will amend Income Tax  Rule 10, the Mint report said.

The amendments aim to further clarify how much income can be “deemed to accrue or arise in India” for non-residents—especially in the context of digital businesses or cross-border transactions.

Currently, tax officials use different methods to determine the portion of a non-resident firm’s profits that can be taxed in India.

These include basing it on a share of overall global sales attributed to India or on global profits allocated by India’s share of total sales.

Such approaches involve considerable discretion. As a result, businesses have sometimes faced uncertainties and potential disputes over how much of their income is subject to Indian taxes.

The new rules are likely to create a clear template for tax officials by considering several objective factors.

These may include the foreign company’s sales in India, the number of employees, or amount of assets it has in the country, and in the case of digital platforms, the size of its Indian user base.

By introducing a uniform formula, regulators aim to ensure consistent and transparent determinations of taxable profits, helping avoid ambiguity and potential conflicts in the tax assessment process.