Tax certainty: Presumptive regime key to boosting India's FDI flows

It is well acknowledged that India needs large amounts of foreign direct investment (FDI) to push up its investment rate and, in a sustainable manner, improve its growth rate. However, tax uncertainty remains one of the biggest drags on India’s full FDI potential. In this regard, the NITI Aayog’s latest “Tax Policy Working Paper” rightly diagnoses the core of the problem. Ambiguity in defining the “permanent establishment” (PE) and profit attribution rules has blurred the line between “business presence” and “taxable presence”, introducing a risk premium for investors. An unexpected PE trigger, exposing investors to retrospective tax demands, could lead to substantial and unforeseen tax liabilities on income earned from India, thereby deterring investment. The premium not only deters new entrants but also drives existing firms towards complex, indirect investment structures designed for tax arbitrage. The result is capital inefficiency and costly litigation. 

Recent Supreme Court rulings, cited in the working paper, illustrate how unpredictable outcomes can emerge from the same legal framework. In Formula One World Championship Ltd vs Commissioner of Income Tax (2017), the apex court held that the Buddh International Circuit constituted a fixed-place PE for the foreign enterprise, as the event was “under the control and disposal” of the taxpayer, even though it lasted just a few days. The 2025 Hyatt International (Southwest Asia) Ltd vs Additional Director of Income Tax judgment further extended this logic to India-United Arab Emirates treaty cases, reaffirming that management or coordination activities, even without a physical office, could trigger PE liabilities. While these decisions uphold the integrity of India’s taxing rights, they underscore an urgent dilemma. Without clear, objective standards for what constitutes a PE, India risks conflating a legitimate commercial presence with taxable control. Major disputes often take six to 12 years to reach a final settlement. For foreign businesses, such litigation timelines translate into frozen assets, accumulated interest liabilities, and a loss of strategic momentum. 

Thus, the challenge is not India’s assertion of its tax rights but the opacity of the rules. Modern investment hubs cannot function on case-by-case jurisprudence. Countries like Singapore and the Netherlands codify precise thresholds for PE — based on duration, activity type, and degree of control — to minimise discretion. India’s current ambiguity diverges from this global best practice, increasing compliance uncertainty. The NITI Aayog’s proposal to introduce an optional presumptive-taxation scheme for foreign entities would be a constructive step in this regard. Under the proposed scheme, foreign firms could opt in to pay taxes on a predefined, sector-specific percentage of their gross revenues from India. Firms choosing this route would benefit from safe-harbour protection because tax authorities would not separately litigate the existence of a PE for that activity, relieving them from maintaining locally exhaustive books. Importantly, firms that believe their actual profits fall below the presumptive amount could instead file under the regular regime. Thus, it offers investors clarity upfront on tax liability while safeguarding revenue predictability. However, success depends on careful calibration. Industry-specific tax rates must be data-driven, not arbitrary, and the tax administration must build the institutional capacity to implement it consistently.