India proposes extending tax breaks for contract manufacturing in a boost for Apple
A draft amendment proposes extending, from March 31, 2031 to March 31, 2041, a tax exemption for foreign companies that supply machinery and equipment to India-based contract manufacturers of mobile phones, tablets, laptops, hearing devices, and wearable electronics.
The exemption shields such foreign equipment suppliers from having their global profits taxed in India merely because their machinery is used inside Indian factories, addressing concerns that ownership of high-value manufacturing equipment could be treated as creating a taxable "business connection" in India.
The original exemption was introduced earlier in 2026 following representations from global electronics manufacturers about tax uncertainty affecting long-term investment decisions in Indian contract manufacturing.
The exemption applies to facilities in customs-bonded warehouses/factories treated as being outside India's customs territory for import-duty purposes; goods sold into the domestic market still attract applicable import duties.
The move is aimed at reinforcing India's position in global electronics supply chain diversification, as manufacturers relocate assembly operations away from single-country concentration.
"Business Connection" and Section 9 of the Income Tax Act, 1961
Section 9 deems income to "accrue or arise in India" for a non-resident where a "business connection" exists in India — a concept broader than a formal branch or subsidiary, extending to any continuous business relationship generating income through activities carried out in India. Courts have held that even providing equipment or agency-type presence, without a formal establishment, can trigger a business connection under certain facts.
Key Details
- The term "business connection" is not exhaustively defined in the Act but is explained through inclusive provisions and case law (e.g., establishing that habitual activity on behalf of a non-resident in India can constitute a business connection).
- Explanation 2A to Section 9(1)(i), inserted by the Finance Act, 2018, added the "Significant Economic Presence" test, taxing non-residents on income from transactions or digital interactions in India even without physical presence, effective Assessment Year 2019-20.
- If a "business connection" is established, only the income reasonably attributable to Indian operations is taxable in India — but establishing that attribution creates litigation risk and uncertainty for multinational supply chains.
Foreign electronics companies feared that owning and supplying precision manufacturing equipment to Indian contract manufacturers could itself be read as a "business connection," exposing their entire global product profits (not just India-linked income) to Indian tax scrutiny. The exemption explicitly carves out this scenario, and its proposed 10-year extension signals a long-term policy commitment to remove this risk.
Customs Bonded Warehouses and Manufacturing-and-Other Operations in Bonded Warehouse (MOOWR) Scheme
A customs bonded warehouse is a facility licensed under the Customs Act, 1962 where imported goods can be stored, and even manufactured, without immediate payment of customs duty; duty becomes payable only if and when goods are cleared for the domestic market, while duty is fully waived for goods that are re-exported.
Key Details
- Governed by Sections 58 and 65 of the Customs Act, 1962, and operationalised for manufacturing through the MOOWR (Manufacture and Other Operations in Warehouse) Regulations, 2019.
- Deferred/exempted customs duty improves cash flow for manufacturers importing capital equipment and components, a key incentive for setting up electronics assembly in India.
The equipment-supply tax exemption operates alongside bonded-warehouse treatment of contract manufacturing facilities — reinforcing India's strategy of using duty deferral plus direct tax certainty to attract high-value electronics assembly, particularly for products destined for export.
Electronics Manufacturing Push — PLI Scheme and "China Plus One"
India has used the Production Linked Incentive (PLI) Scheme for large-scale electronics manufacturing (notified 2020) alongside tax and customs measures to attract global electronics assemblers seeking to diversify supply chains beyond a single manufacturing base, a strategy often termed "China Plus One."
Key Details
- The PLI Scheme for large-scale electronics manufacturing offers incentives of 4-6% on incremental sales of eligible mobile phone manufacturing over a base year, for a five-year period, for companies meeting minimum investment thresholds.
- India's share of global smartphone/iPhone-class device manufacturing has risen sharply in recent years as assembly has diversified away from concentration in a single country.
The tax exemption extension for equipment suppliers is a complementary, non-PLI lever — addressing a tax-certainty barrier (rather than a direct subsidy) that multinational electronics firms had identified as a risk to committing further long-term capital to Indian contract manufacturing.
- Proposed extension: tax exemption for foreign equipment suppliers to contract manufacturers, from March 31, 2031 to March 31, 2041 (a 10-year extension).
- Products covered: mobile phones, tablets, laptops, hearing devices, and wearable electronic devices.
- The original exemption was introduced earlier in 2026, initially valid until March 2031.
- Explanation 2A (Significant Economic Presence) to Section 9(1)(i) of the Income Tax Act was inserted by the Finance Act, 2018, effective Assessment Year 2019-20.
- India's share of global iPhone manufacturing has grown substantially over the past four years, according to industry estimates, reflecting broader electronics supply-chain diversification into India.