Govt unveils tax overhaul to woo global investors, boost manufacturing
The Taxation and Other Laws (Amendment) Bill, 2026 was circulated, proposing to relax conditions under which offshore funds managed from India can claim tax exemption
Overseas funds will be able to appoint India-based fund managers without automatically triggering Indian tax liability on the fund, provided prescribed safeguards are met
The Bill extends a tax exemption for foreign companies supplying equipment and parts to electronics contract manufacturers operating out of customs-bonded factories and warehouses, available until 2041
A 15-year tax holiday (up to 31 March 2041) is proposed for specified foreign mining companies, sightholders, brokers, aggregators, and tender/auction entities dealing in rough diamonds within a notified Special Notified Zone in India
The measures are aimed at improving India's attractiveness for global fund management, offshore investment, and contract manufacturing activity
Offshore Fund Management and the "Fund Manager Presence" Safe Harbour
Under Indian tax law, a foreign fund could historically become taxable in India (and lose its offshore status) merely because its fund manager operated from India — this is the "fund manager presence" rule under Section 9A of the Income-tax Act, 1961, introduced to prevent offshore funds from being treated as having a business connection in India solely due to a India-based manager, provided eligibility conditions are met.
Key Details
- Section 9A of the Income-tax Act, 1961 (introduced via the Finance Act, 2015) provides that an eligible offshore investment fund will not be treated as a resident in India, or as having a business connection in India, merely because an eligible fund manager undertakes fund management activity from India
- Eligibility conditions include fund residency, corpus thresholds, investor diversification (no single investor holding more than a specified percentage), and arm's-length remuneration to the fund manager
- The 2026 Bill proposes to relax/simplify these compliance conditions while retaining core safeguards against tax avoidance
The Bill builds directly on the Section 9A safe-harbour framework, easing the compliance burden so that more global fund managers are willing to relocate fund management operations (though not the fund itself) to India, such as to GIFT City/IFSC.
Special Notified Zone (SNZ) — Diamond Trading Tax Regime
A Special Notified Zone is a designated tax zone (notably in Mumbai and Surat) created to allow foreign mining companies and other specified entities to display, and eventually sell, rough (uncut) diamonds in India without full exposure to Indian income tax, in order to shift diamond trading activity away from overseas trading hubs like Antwerp and Dubai.
Key Details
- Income from mere display of rough diamonds in an SNZ (without sale) has been exempt from tax under the Income-tax Act, 1961 for activities from 1 April 2015 onward
- Eligible foreign companies opting for the safe harbour regime declare a minimum profit of 4% of gross receipts and pay tax at the applicable foreign-company rate (35% plus surcharge), with no further deductions allowed
- To qualify, rough diamonds must meet conditions under the safe harbour rules, including being accompanied by a Kimberley Process Certificate (the international scheme certifying diamonds as conflict-free)
- The 2026 Bill extends this regime to cover actual sale (not just display) of rough diamonds by mining companies, sightholders, brokers, aggregators, and tender/auction entities, with exemption available up to 31 March 2041
This bridges India's Kimberley Process obligations, SEZ-style tax zones, and safe-harbour taxation — extending the SNZ concept from display-only to full sale of rough diamonds strengthens India's (particularly Surat's) position as a global diamond-trading and cutting-polishing hub.
Electronics Contract Manufacturing and Customs-Bonded Warehousing
The Bill extends tax exemption to foreign firms that supply components/parts to electronics contract manufacturers operating from customs-bonded factories or warehouses in India — linking to India's broader push for electronics manufacturing under schemes like the Production Linked Incentive (PLI) for large-scale electronics manufacturing.
Key Details
- Customs-bonded manufacturing (under Section 65 of the Customs Act, 1962) allows imported inputs to be stored and processed without immediate duty payment, with duty deferred until the finished goods are cleared for domestic sale
- The tax exemption for foreign suppliers' income from storing and providing parts to such contract manufacturers is proposed to run until 2041, mirroring the diamond and offshore-fund sunset dates
- This complements the PLI Scheme for Large Scale Electronics Manufacturing (2020), which targets mobile phone and component manufacturing
Removing the tax friction on foreign component suppliers is intended to deepen electronics supply chains inside India, supporting the "China+1" diversification of global electronics manufacturing toward India.
- Section 9A of the Income-tax Act, 1961 (Finance Act, 2015) — safe harbour for offshore fund managers operating from India
- SNZ safe-harbour minimum profit declaration: 4% of gross receipts; tax at 35% (plus surcharge) foreign-company rate
- Diamond trading tax exemption proposed: 15-year tax holiday, up to 31 March 2041
- Electronics contract manufacturing tax exemption for foreign suppliers: extended until 2041
- Rough diamonds must carry Kimberley Process Certification to qualify under the safe harbour rules
- Customs-bonded manufacturing governed under Section 65 of the Customs Act, 1962