In News:

In October 2025, NITI Aayog released the first paper under the NITI Tax Policy Working Paper Series–I, titled “Enhancing Tax Certainty in Permanent Establishment and Profit Attribution for Foreign Investors in India.” The paper seeks to enhance transparency, predictability, and fairness in India’s international taxation framework—key to attracting and sustaining foreign investment in the journey towards Viksit Bharat@2047.

Background and Rationale

• Foreign Direct Investment (FDI) has been a cornerstone of India’s economic growth, rising from USD 6 billion in 2005–06 to nearly USD 50 billion in 2024–25. Despite this growth, foreign investors have long faced tax-related uncertainties—particularly concerning the definitions of Permanent Establishment (PE) and Profit Attribution. Ambiguities in these areas have led to prolonged litigation (often lasting 10–12 years), raising compliance costs and discouraging potential investors.
• To address these challenges, NITI Aayog’s Consultative Group on Tax Policy (CGTP)—comprising representatives from the CBDT, DPIIT, ICAI, industry experts, and major consultancy firms—developed this working paper through extensive stakeholder consultations.

Key Concepts

• Permanent Establishment (PE): Refers to a fixed place of business (like a branch, office, or digital presence) through which a foreign enterprise conducts business in India. If a PE exists, the enterprise is liable to pay tax on its income arising in India.
• Profit Attribution: Determines the portion of a multinational’s profits that can be taxed in India, particularly when business activities are spread across jurisdictions.

Major Recommendations

• Optional Presumptive Taxation Scheme:
  • Allows foreign companies to opt for a fixed tax rate on India-sourced revenue, based on industry norms.
  • Aims to minimize litigation and enhance predictability.
• Legislative Clarity:
  • Codification of PE definitions and profit attribution rules in line with OECD and UN models.
  • Avoidance of retrospective taxation and inclusion of due process safeguards.
• Strengthened Dispute Resolution:
  • Expansion of Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs).
  • Exploration of mandatory arbitration for unresolved international tax disputes.
• Administrative and Institutional Efficiency:
  • Introduction of safe harbour rules to simplify compliance.
  • Adoption of the OECD’s TRACE system to streamline withholding tax relief.
  • Continuous training of tax officials in complex cross-border taxation matters.
• Stakeholder Engagement and Transparency:
  • Mandatory public consultations before major tax law amendments.
  • Enforcement of a Taxpayer Charter to uphold fairness and transparency.

Judicial Context

The Supreme Court has played a pivotal role in interpreting India’s international tax framework:

• Formula One Case (2017): Held that even temporary use of infrastructure (like a race track) could constitute a PE, emphasizing substance over form.
• Hyatt International Case (2025): Clarified that even global losses do not exempt Indian operations from taxation, reinforcing the “separate enterprise” principle.

Alignment with Global Tax Reforms

India’s approach aligns with the OECD–G20 Base Erosion and Profit Shifting (BEPS) initiative, especially Action 7, which curbs tax avoidance through agency arrangements.

• Pillar One: Ensures digital giants like Google or Amazon pay taxes where consumers are located, even without a physical presence.
• Pillar Two: Introduces a global minimum corporate tax rate of 15%, deterring profit shifting to tax havens.

Significance:

The working paper provides a comprehensive framework for reforming India’s cross-border tax regime—balancing investor confidence with national revenue interests. By enhancing certainty, reducing litigation, and aligning with international standards, it aims to:

• Strengthen India’s Ease of Doing Business environment.
• Attract high-quality, sustainable FDI and FPI.
• Bolster administrative efficiency and taxpayer trust.

Ultimately, these reforms are expected to create afair, transparent, and globally competitive tax system, reinforcing India’s trajectory toward a future-ready economy and the vision of Viksit Bharat@2047.