Lok Sabha passes Taxation and Other Laws (Amendment) Bill to boost foreign investment, electronics manufacturing
The Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026, amending the Income-tax Act, 2025, the Payment and Settlement Systems Act, 2007, and the Finance Act, 2026
The Bill reduces the eligibility conditions for offshore investment funds and their India-based fund managers to qualify for the tax safe harbour, cutting the number of conditions from 13 to five
Tax exemptions for foreign companies supplying capital goods, equipment or tooling to Indian electronics contract manufacturers are extended to the tax year ending 31 March 2041 (from the earlier sunset of 2030-31), with the list of covered electronic goods expanded to include laptops, tablets, servers, hearables and wearables
Foreign diamond mining companies, brokers, aggregators, sightholders and auction entities selling rough diamonds through notified Special Notified Zones also receive tax exemption extended to 31 March 2041
The Bill provides for restoring tax exemption on dividend income distributed to unit holders of REITs and InvITs, subject to a 15% additional surcharge at the level of the underlying special purpose vehicle
Section 9A Safe Harbour for Offshore Fund Managers
Section 9A of income tax law (carried forward into the Income-tax Act, 2025) shields non-resident investment funds from being treated as tax residents of India merely because their fund manager operates from India. Without this safe harbour, an offshore fund managed out of India could be deemed to have a "business connection" in India, exposing its entire global income to Indian tax.
Key Details
- Introduced as Section 9A of the Income-tax Act, 1961 to encourage fund managers to relocate to India (the "Ease of Doing Business for Fund Managers" reform)
- Conditions include a minimum number of unrelated fund members, a cap of 5% on participation by India-resident investors, and mandatory SEBI registration of the eligible fund manager as a portfolio manager or investment adviser
- The 2026 Bill reduces the total number of conditions an eligible fund must satisfy from 13 to five, while retaining the core anti-abuse safeguards
The reduced compliance burden is intended to make it more attractive for global asset managers to relocate fund management activity to India (including India's International Financial Services Centre) without losing offshore tax treatment for the fund itself.
Electronics Manufacturing Tax Exemption and the Broader PLI Ecosystem
India's push for electronics manufacturing combines direct fiscal incentives (the Production Linked Incentive, or PLI, scheme for large-scale electronics manufacturing, launched in 2020) with indirect tax carve-outs for the foreign supply chain that feeds Indian contract manufacturers. The provision extended by this Bill falls in the second category — it exempts foreign companies (not Indian manufacturers) from Indian tax when they supply capital goods, equipment or tooling used to make electronic goods in India.
Key Details
- The exemption for foreign suppliers of capital goods/tooling to Indian electronics contract manufacturers is extended from the 2030-31 sunset to the tax year ending 31 March 2041
- The definition of "specified electronic goods" is widened to include laptops, tablets, servers, hearables and wearables and related accessories, aligning with the expanded scope of PLI 2.0 for IT hardware
- Foreign companies storing electronic components in customs-bonded warehouses for supply to Indian contract manufacturers separately receive a 15-year income tax exemption
By locking in tax certainty for foreign capital-goods suppliers until 2041, the Bill aims to make India's electronics contract-manufacturing ecosystem more attractive relative to competing hubs such as Vietnam, and complements the PLI scheme's direct subsidy route with a longer tax-certainty runway.
Special Notified Zones for Rough Diamond Trade
A Special Notified Zone (SNZ) is a customs-cleared area — such as at the Bharat Diamond Bourse in Mumbai — where foreign entities can display and sell rough (uncut) diamonds to Indian buyers without the transaction being treated as a taxable business presence in India. The framework was first introduced in 2015 to encourage global mining companies to sell directly to Indian cutting and polishing centres, which account for a large share of world diamond processing.
Key Details
- SNZ tax exemption for income from the mere display of rough diamonds was first notified with effect from 1 April 2015
- Eligible entities include foreign diamond mining companies, brokers, aggregators, sightholders and tender/auction entities
- SNZs currently operate in Mumbai and Surat; the 2026 Bill extends the exemption on income from actual sale (not just display) of rough diamonds through these zones to 31 March 2041
Extending certainty to 2041 is meant to shift more of the global rough-diamond trading volume to Indian zones rather than established hubs like Antwerp or Dubai, supporting India's diamond cutting and polishing industry, which processes a large share of the world's diamonds by volume.
Money Bill vs Financial Bill — Legislative Classification
The Constitution distinguishes a Money Bill (Article 110) from an ordinary Financial Bill (Article 117). Only a bill dealing exclusively with the matters listed in Article 110 — such as imposition, abolition, or alteration of a tax — can be certified a Money Bill by the Speaker of the Lok Sabha; a Financial Bill that also contains non-Article 110 provisions follows the ordinary legislative process.
Key Details
- A Money Bill can only be introduced in the Lok Sabha (Article 109) and, once passed there, goes to the Rajya Sabha only for recommendations, which the Lok Sabha may accept or reject; the Rajya Sabha cannot amend or reject it outright
- The Rajya Sabha has 14 days to return a Money Bill; if it does not, the bill is deemed passed in the form sent by the Lok Sabha
- A Financial Bill covering matters beyond Article 110 (as this Amendment Bill does, touching payment systems regulation alongside tax provisions) is treated as an ordinary bill for Rajya Sabha purposes, giving the Upper House full powers to amend or reject relevant provisions
Because the Taxation and Other Laws (Amendment) Bill amends multiple statutes spanning tax and payment-systems regulation, its classification (Money Bill versus ordinary Financial Bill) determines how much scrutiny and amendment power the Rajya Sabha retains over it after Lok Sabha passage.
- Offshore fund/fund-manager safe harbour conditions reduced: from 13 to 5
- Electronics manufacturing capital-goods supplier tax exemption extended to: tax year ending 31 March 2041 (from 2030-31)
- Customs-bonded warehouse component storage exemption: 15 years
- Diamond trade Special Notified Zone exemption (display): in force since 1 April 2015; sale-income exemption now extended to 31 March 2041
- REIT/InvIT SPV-level additional surcharge on dividend distribution: 15%
- Acts amended: Income-tax Act, 2025; Payment and Settlement Systems Act, 2007; Finance Act, 2026
- SNZs currently notified in: Mumbai and Surat