India’s tax landscape is undergoing a structural shift driven by digitalisation, fiscal pressures and coordinated international reforms. As the world’s fastest growing economy, India continues to modernise its tax framework, expand real-time compliance and renegotiate tax treaties—all developments that carry significant implications for multinational enterprises (MNEs).
For global enterprises, these reforms present both opportunity and complexity. Rationalised tax rates and the elimination of overlapping taxes promise greater certainty and reduced disputes in cross-border transactions. At the same time, the rapid expansion of digital reporting, real-time compliance and data-driven enforcement introduces new operational demands.
Income Tax Act, 2025
Effective 1 April 2026, the Income Tax Act, 2025 replaces the Income-tax Act, 1961. The legislation reorganises India’s tax framework into a more streamlined, globally aligned structure designed to improve the ease of doing business and foster a trust-based compliance environment. One of the most notable changes is the move to a single “tax year” replacing the earlier dual concepts of “previous year” and “assessment year.” New rules and forms have also been notified to operationalise the new act, and these are also effective from 1 April 2026.
The new act consolidates and restructures various provisions, including tax withholding, requiring taxpayers to revalidate applicable tax rates under the legislation and relevant tax treaties. Supporting documentation, such as tax residency certificates (TRC) and beneficial ownership declarations, remains essential to support treaty claims. Taxpayers claiming treaty benefits must now provide additional disclosures in new Form 41, along with a valid TRC.
Revised valuation rules require accurate reporting of expatriate compensation, stock-based incentives and allowances. Compliance penalties for violations, such as failure to comply with audit and reporting requirements, failure to furnish a statement of financial and reportable transactions, etc., have been rationalised and several prosecution provisions have been decriminalised, replacing rigorous imprisonment with simple imprisonment.
General anti-avoidance rule (GAAR)
In Tiger Global International II Holdings, the Indian Supreme Court held that the Rule 10U(2) of the Income-tax Rules, 1962 does not automatically grandfather pre-existing arrangements (for prior coverage, see the article in the February 2026 issue of Corporate Tax News and see the article in this issue). If a tax benefit arises on or after 1 April 2017, the GAAR may apply regardless of when the investment was made, effectively diluting the protection for pre-April 2017 investments. To resolve this ambiguity, the Central Board of Direct Taxation (CBDT) issued two notifications on 31 March 2026 amending both the Income Tax Rules, 1962 and the newly notified Income Tax Rules, 2026. The amended rules clarify that the GAAR applies to any arrangement yielding a tax benefit on or after 1 April 2017, irrespective of when the arrangement was entered. However, income arising from the transfer of investments made before that date remains protected, preserving the original grandfathering intent.
Recent pronouncements by the tax authorities
Amendment of India–Brazil tax treaty
The Ministry of Finance has notified the protocol amending the Brazil-India tax treaty, effective 1 April 2026, which introduces several changes that are critical for MNEs:
India’s abolition of unilateral digital taxation measures, such as the equalisation levy, signals alignment with global digital taxation norms and movement toward implementation of the Pillar Two framework. Other notable trends include:
India’s reforms mark a decisive shift toward a substance-driven, technology-enabled and globally harmonised tax regime. While the new Income Tax Act, 2025, clarifications of the GAAR and treaty renegotiations enhance certainty and reduce arbitrage opportunities, they also elevate compliance expectations for MNEs. Businesses should:
Niranjan Govindekar
Shilpa Sethia
Tushar Desai
BDO in India
For global enterprises, these reforms present both opportunity and complexity. Rationalised tax rates and the elimination of overlapping taxes promise greater certainty and reduced disputes in cross-border transactions. At the same time, the rapid expansion of digital reporting, real-time compliance and data-driven enforcement introduces new operational demands.
New Rules, Reporting Requirements and Related Guidance
Income Tax Act, 2025Effective 1 April 2026, the Income Tax Act, 2025 replaces the Income-tax Act, 1961. The legislation reorganises India’s tax framework into a more streamlined, globally aligned structure designed to improve the ease of doing business and foster a trust-based compliance environment. One of the most notable changes is the move to a single “tax year” replacing the earlier dual concepts of “previous year” and “assessment year.” New rules and forms have also been notified to operationalise the new act, and these are also effective from 1 April 2026.
The new act consolidates and restructures various provisions, including tax withholding, requiring taxpayers to revalidate applicable tax rates under the legislation and relevant tax treaties. Supporting documentation, such as tax residency certificates (TRC) and beneficial ownership declarations, remains essential to support treaty claims. Taxpayers claiming treaty benefits must now provide additional disclosures in new Form 41, along with a valid TRC.
Revised valuation rules require accurate reporting of expatriate compensation, stock-based incentives and allowances. Compliance penalties for violations, such as failure to comply with audit and reporting requirements, failure to furnish a statement of financial and reportable transactions, etc., have been rationalised and several prosecution provisions have been decriminalised, replacing rigorous imprisonment with simple imprisonment.
General anti-avoidance rule (GAAR)
In Tiger Global International II Holdings, the Indian Supreme Court held that the Rule 10U(2) of the Income-tax Rules, 1962 does not automatically grandfather pre-existing arrangements (for prior coverage, see the article in the February 2026 issue of Corporate Tax News and see the article in this issue). If a tax benefit arises on or after 1 April 2017, the GAAR may apply regardless of when the investment was made, effectively diluting the protection for pre-April 2017 investments. To resolve this ambiguity, the Central Board of Direct Taxation (CBDT) issued two notifications on 31 March 2026 amending both the Income Tax Rules, 1962 and the newly notified Income Tax Rules, 2026. The amended rules clarify that the GAAR applies to any arrangement yielding a tax benefit on or after 1 April 2017, irrespective of when the arrangement was entered. However, income arising from the transfer of investments made before that date remains protected, preserving the original grandfathering intent.
Recent pronouncements by the tax authorities
- Buyback of shares qualifies as a “business reorganisation” under the India-Netherlands tax treaty: In a significant ruling, the Delhi Income Tax Appellate Tribunal held that an intragroup share buyback by an Indian subsidiary from its 99.98% Dutch parent constitutes a "corporate reorganisation" under article 13(5) of the India–Netherlands tax treaty. As a result:
- Capital gains are taxable exclusively in the Netherlands, not in India.
- The “exception to the exception” under article 13(5) applies where capital gains arise in the course of a genuine corporate intragroup restructuring.
- Industry specific tax developments: To attract global business and investment and promote manufacturing, data centres, artificial intelligence (AI) and the financial sector, the following tax holiday exemptions have been introduced/extended with effect from 1 April 2026.
| Eligible Person | Exempt Income |
| Foreign company | Income from providing global cloud services using India-based data centre services and routed through an Indian reseller. The exemption is valid until tax year 2046-47. Related party data centres providing services to foreign entities are granted a 15% "safe harbour" margin on costs. |
| Foreign company | Income from supplying capital goods, equipment or tooling to a contract manufacturer located in a customs-bonded warehouse producing electronic goods on behalf of the foreign company. The exemption is available until tax year 2030-31. |
| Units in IFSC and OBUs | Tax holiday on specified income earned by units located in International Financial Services Centre and Offshore Banking Units is extended from 10 years to 20 years. |
Changes Impacting Cross‑Border Transactions
Amendment of India–Brazil tax treatyThe Ministry of Finance has notified the protocol amending the Brazil-India tax treaty, effective 1 April 2026, which introduces several changes that are critical for MNEs:
- The expanded permanent establishment (PE) rules include a 183-day service PE threshold, anti-fragmentation provisions and a broader dependent agent PE definition that will make it more difficult to avoid PE exposure through disaggregated structures.
- Capital gains on share transfers are taxable in the source state.
- A new article provides a 10% tax rate for fees for technical services.
- The rationalisation of rates on dividends, interest and royalties provides a commercially attractive foundation for bilateral investment.
- The removal of the 25% tax sparing credit on interest and royalties may increase the effective cost of cross-border financing and technology arrangements.
- A new limitation of benefits clause tightens treaty access for low-substance structures.
Emerging Tax Trends
India’s abolition of unilateral digital taxation measures, such as the equalisation levy, signals alignment with global digital taxation norms and movement toward implementation of the Pillar Two framework. Other notable trends include:
- Enhanced transparency through digital reporting and cross-border information exchange, enabling real-time risk assessment and reducing the scope for tax evasion;
- Evolving interpretations of the concept of a PE, particularly in remote work scenarios, expanding tax nexus considerations, and requiring multinational groups to reassess their global mobility and operational structures;
- Broader tax base expansion, including clearer rules for digital assets and cryptocurrencies; and
- Real-time risk assessment enabled by data-driven enforcement systems.
BDO Perspective
India’s reforms mark a decisive shift toward a substance-driven, technology-enabled and globally harmonised tax regime. While the new Income Tax Act, 2025, clarifications of the GAAR and treaty renegotiations enhance certainty and reduce arbitrage opportunities, they also elevate compliance expectations for MNEs. Businesses should:
- Reassess cross-border structures in light of the new PE, GAAR and treaty rules (if applicable);
- Strengthen documentation supporting treaty eligibility and beneficial ownership;
- Invest in robust data, reporting and compliance systems to meet real-time compliance obligations; and
- Evaluate opportunities arising from new tax exemptions for cloud services, data centre operations and manufacturing-linked activities.
Niranjan Govindekar
Shilpa Sethia
Tushar Desai
BDO in India