India Budget 2025 - New scheme for ‘Presumptive Taxation’ for Non-Residents engaged in providing Services

published on 14 May 2025 | reading time approx. 4 minutes

The Indian government has been actively promoting the Electronics Manufacturing Industry through various initiatives and policies. In the Union Budget 2025 as well, new provision has been introduced under Income Tax Act, 1961 ('ITA') to promote this industry by ensuring tax certainty to non-residents (NR) engaged in providing services or technology in India for setting up Electronics Manufacturing Facility ('EMS') or manufacturing electronic products in India. Accordingly, Indian Government has formulated a scheme¹ to help in developing a robust ecosystem by attracting large investments (global/domestic) in electronics component manufacturing ecosystem.

Section 44BBD has been inserted in the ITA to introduce the new presumptive taxation scheme. The salient features of the scheme are as follows:

Deemed Profits: 25% of the total amounts received or receivable for providing such services or technology will be deemed as profits for NRs.
Tax Rate: The applicable tax rate of 35% (plus surcharge and cess) will be applied on these deemed profits, resulting in an effective tax rate of less than 10% on gross receipts.
Restrictions: NRs covered by this section will not be allowed to set off unabsorbed depreciation or carried-forward losses of past years.
Effective Date: The amendment is set to take effect from April 1, 2026.

Non-residents, not having Permanent Establishment (PE) in India, are generally subject to tax at prescribed rates under tax treaties, ranging from 10% to 20% on their gross income from the provision of technical services or royalties. The proposed section prescribes a rate lower than most Indian tax treaties and is therefore expected to be attractive to non-residents. Additionally, it promotes ease of compliance for such non-residents. It is, however, likely that Transfer Pricing requirements will continue to apply to such NRs in respect of their transactions with associated enterprises in absence of clear exemptions or relaxations.

Interestingly, the New Income Tax Bill 2025 (NITB), has also retained a provision coterminous with Section 44BBD. This is significant because it suggests that the government is committed to maintain these provisions for the long term, indicating a stable tax regime for NRs engaged in the electronics manufacturing sector. The impact of any differences between provisions of Section 44BBD and corresponding provision under NITB need to be resolved to avoid any interpretation issues.

Some issues for deliberation

The proposed scheme requires NRs to pay tax on 25% of their gross receipts, unlike other schemes that allow declaring lower profits based on actual income. This could be challenging for NRs who have lower profits or even losses, as they will not be able to reduce their tax liability based on actual profitability from books of accounts that can be derived maintained and audited, unless they are able to resort to tax treaty provisions. A snapshot of similar presumptive schemes for NRs is provided in the Appendix to this Article.

Typically, the setting up of a manufacturing facility is expected to take several years and depending on the level of involvement in on-ground activities in India, in some cases, there could be a possibility that NRs providing such assistance could face the challenges of a PE constitution and related compliance burden.

If there are lower or no profits in a situation where PE is constituted, then there could be lower tax liability on application of 35% (plus surcharge and cess) tax rate to PE profits or in case of loss situation. However, applicability of tax treaty provisions, in case PE is constituted, could be challenged by tax authorities, since generally there is a reference to domestic tax law provisions under Article 7 of tax treaties that deals with profits attributable to PE.

Further, if a PE is established, a gamut of compliances would apply such as withholding tax compliances, maintenance of books of accounts, statutory audits etc. and consequently, even if such tax saving is to be claimed on constitution of PE, then additional PE related compliances would need to be undertaken. As such, in cases where NRs incur losses or earn lower profits, NRs will suffer either due to higher tax liability as per presumptive taxation under Section 44BBD and additional set of compliances applicable, in case PE is constituted. However, this situation is prevalent, to some extent, even under existing deemed taxation provisions that were introduced in past for other companies in specified business activities.

Conclusion

The proposed presumptive taxation under Section 44BBD offers a simplified tax compliance process for NRs, though there are still some areas that could benefit from further clarification to avoid disputes regarding possibility to opt out of presumptive taxation to replace with actual profit numbers in case of lower profitability, its interaction with other tax provisions and the treatment of income related to an NR's PE in India. Overall, the amendment is a positive step toward streamlining the tax regime, and additional clarity will help ensure smooth implementation.

Summary of Presumptive Taxation Provisions applicable to Non-Residents (NRs)

Section	Nature of income	Deemed percentage	Option to declare lower income	Eligibility of Set off of brought forward losses and unabsorbed depreciation
44B	Shipping Business	7.5%	No	Yes
44BB	Business of providing services or facilities related to mineral oil exploration, or supplying plant and machinery on hire for such activities	10%	Yes	Not eligible, if NR declares income as per presumptive Taxation
44BBB	Foreign companies engaged in the business of civil construction, erection of plant and machinery, testing, or commissioning related to turnkey power projects approved by the Central Government	10%	Yes	Not eligible if NR declares income as per presumptive taxation
44BBA	Operation of Aircraft	5%	No	No express restriction
44BBD	Providing services or technology in India for setting up an electronic manufacturing facility or manufacturing goods	25%	No	Not eligible if NR declares income as per presumptive taxation