Tax rules on foreign companiesImage Credit source: AI
The central government can take a big and important decision in Budget 2026 regarding tax rules related to foreign companies. Especially for those companies, which are earning well through digital or technology without setting up a big office or factory in India. The government is now considering bringing such rules so that the tax system can be made more clean, easy and dispute-free.
Till now, tax on a foreign company in India is clearly imposed only when it is considered to have a permanent establishment here. But in the era of digital companies, it has become difficult to decide whether the real presence of the company is in India or not. Due to this confusion, many companies have received tax notices and long cases are going on. Now the government is considering introducing a formula-based tax system in place of the old rules, in which a certain part of the company’s profits will come under the tax net on the basis of India-related earnings.
Why has this change become necessary?
There are talks going on around the world on a global tax system under OECD, but there are continuous delays in it. In such a situation, the Indian government does not want the country’s tax rights to be weakened. For this reason, there is a preparation to bring such a system at the domestic level, which will provide certainty in taxes to foreign and multinational companies and proper revenue to the government.
Relief on small earnings, rules fixed on big earnings
According to the ET report, if the payment received directly from India by a foreign company is less than Rs 10 lakh, then there will be no additional tax on it. But if this limit is crossed, then a fixed formula will be used to decide how much profit will be subject to tax in India. This will provide relief to small companies and startups, while the same rules will apply to big digital and tech companies. Apart from this, the government is also taking care that the companies are not hit with double tax. If an Indian associate company has already paid tax, then the foreign company will get tax credit on the same profit. This will make the system more fair and transparent.
What will change for GCCs and digital companies?
Many GCCs and data centers present in India have till now faced uncertainty regarding tax. With the implementation of the new rules, they will have a clear idea of how much tax they have to pay and why. This will improve the investment environment and may reduce litigation. If these changes are implemented in Budget 2026, India can emerge as a digital-friendly but tax-smart country. It is possible that tax rates may not be reduced directly, but with the rules being clear, companies will invest more, which will benefit both employment and the economy.
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