In News:

The Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026, replacing the Income-tax (Amendment) Ordinance, 2026 and amending the Income-tax Act, 2025, Finance Act, 2026, and Payment and Settlement Systems Act, 2007.

The Bill seeks to improve the ease of doing business, attract foreign investment, promote electronics manufacturing, strengthen digital infrastructure and create a sustainable payment ecosystem.

Key Provisions

• The Bill provides a longer tax holiday for electronics manufacturing. Eligible foreign companies supplying capital goods or undertaking contract manufacturing in India can receive tax benefits, with the exemption extended up to 2040–41. It specifically covers products such as mobile phones, laptops, servers and wearables.
• It also provides tax exemptions for eligible foreign diamond companies and electronics manufacturers, including income from rough diamond sales and storage of electronic components in customs-bonded warehouses.
• For international investors, the Bill exempts Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) from income tax on interest and capital gains from government securities. It also simplifies the relocation of foreign fund managers to India, while retaining safeguards against tax avoidance and round-tripping.

Data Centres and Investment Trusts

• The legislation seeks to make India more attractive as a global data-centre and cloud-infrastructure hub by reducing approval requirements for foreign cloud companies using Indian data centres. It also permits data centres to operate on a leased basis, providing greater flexibility.
• For REITs and InvITs, the Bill restores tax-free dividend income for unit holders while increasing the surcharge applicable to Special Purpose Vehicles of business trusts from 10% to 25%.

UPI and Merchant Discount Rate

• A significant provision concerns digital payments. The Bill amends the Payment and Settlement Systems Act, 2007 to empower the Central Government to permit banks and payment service providers to levy charges on UPI and other notified electronic payment modes.
• This could enable the introduction of Merchant Discount Rate (MDR). MDR is the fee paid by a merchant to a bank or payment service provider for processing a digital transaction.
• Since 2020, UPI and RuPay debit-card transactions have operated under a zero-MDR framework to encourage digital payments. The proposed change seeks to create a more sustainable revenue model for banks, PSPs and payment infrastructure providers.