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NITI Aayog's recent working paper titled "Enhancing
Certainty, Transparency and Uniformity in Permanent Establishment
and Profit Attribution for Foreign Investors in India"
highlights the urgent need for India to strengthen tax certainty to
attract sustainable foreign investment.
While India has recorded a steady rise in FDI inflows, from USD
5856 million in 2005-2006 to over USD 50,018 million in 2024-2025,
foreign investors continue to face uncertainty arising from
inconsistent interpretations of Permanent Establishment (PE) and
profit attribution provisions. These issues lead to prolonged
litigation, compliance costs, and unpredictability in tax
outcomes.
The paper identifies that ambiguities in defining PE, especially
under evolving business models such as the digital economy and
service sectors, combined with inconsistent profit attribution
methods, significantly impact India's investment climate.
Recommendations
The highlight of the various recommendations made is the optional Presumptive taxation scheme for foreign companies. Under this system, companies can choose to pay tax, based on a fixed percentage of their revenue from India instead of going through complex PE and attributable profit calculation. Benefits include,
- No need to argue if a PE exists, giving tax certainty
- Fixed profit rates mean less complicated tax work
- Clear rules make tax outcomes predictable
- Fewer tax disputes and legal cases
- More confidence for foreign investors, encouraging investment and ease of doing business
- Potential tax revenue upside as many taxpayers may willingly pay a slightly higher amount under a presumptive rate in exchange for certainty
Apart from the above, following are the other recommendations by the team,
- Clear laws aligned with international standards to reduce confusion
- Reinforce its policy against retrospective tax changes to build investor trust
- Regular and open consultation with businesses and investors especially in matters affecting international investors
- Timely dispute resolution through APA's and MAP's. To actively participate in bilateral APA negotiations
- Training tax officers for consistent and fair application of rules
- Potential tax revenue upside as many taxpayers may willingly pay a slightly higher amount under a presumptive rate in exchange for certainty
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Our Comments Overall, this optional presumptive regime offers a win-win approach: it provides certainty and simplicity for foreign investors, while ensuring a stable and predictable tax base for the government. By minimizing interpretational disputes and codifying clear rules, the proposal not only enhances administrative efficiency but also aligns with international best practices. If implemented effectively, it could mark a major shift in India's international tax landscape, especially relevant in a digital and globally connected economy. |
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