Electronics sector calls for PE tax parity with China and Vietnam

A group representing the electronics industry has requested the government to review permanent establishment (PE) rules to improve India’s tax competitiveness in manufacturing so that the country can compete against China and Vietnam.

 

Indian Cellular and Electronics Association (ICEA) has explained how China and Vietnam have structured PE rules — they determine when a foreign enterprise has a sufficient business presence to be subject to corporate tax in a country — in the past decade to ensure they are competitive against other countries. ICEA, which counts Apple, Tata Electronics, Oppo and Dixon among its members, has met with officials of the Finance Ministry, Ministry of Electronics and Information Technology and Niti Aayog. 

Sources said the government is already looking into the matter. Niti Aayog recently published a report reviewing India’s PE tax regime called “Enhancing Certainty, Transparency and Uniformity in Permanent Establishment and Profit Attribution for Foreign Investors in India”.

 

“Essentially, the growth in electronics, smartphone production and employment is now driven by exports. We are requesting the government to structure rules in a manner that avoids export of taxes and allows our companies to become globally competitive,” said Pankaj Mohindroo, chairman of ICEA.

 

India’s electronics production is worth $135 billion, of which smartphones comprise $64 billion, according to ICEA. Smartphone production has grown 20-fold in the last decade. Smartphone exports in FY25 fetched $24 billion – they are India’s top export, up from 167th rank in FY15.

 

“By seeking this review, we want to achieve three key objectives: Production and exports at global scale, extreme competitiveness and efficiency of operations, and lowering cost of Indian suppliers,” said Mohindroo.

 

India must make annual exports of $180-200 billion to assist the government’s goal of electronics production worth $500 billion by 2031. Smartphones will comprise 40-50 per cent of such exports, according to ICEA. For that, the electronics industry wants Section 9 of the Income Tax Act to be reviewed and PE rules structured in a manner that companies in India are able to pivot to “just-in-time procurement”. This will allow companies to ensure their offshore vendors maintain inventory near assembly units, rather than each component supplier having to ship individual parts to multiple factories in India.

 

ICEA has told the government that international companies can provide high value and specialised capital equipment for free to Indian businesses engaged in producing finished goods. This is a standard global practice where lead firms can retain passive ownership of such machinery and yet, ensure lower foreign exchange outflow and reduced costs to vendors in India. This too would require a review of PE rules.