BDO Corporate Tax News

The first full year budget presented by India’s incumbent government (after retaining power in 2024) was tabled before parliament on 1 February 2025. The Economic Survey 2025, released the previous day, provides an optimistic assessment of the economy, projecting GDP growth for 2025 to be between 6.3% to 6.8%. The main thrust of the survey was on manufacturing, infrastructure and digital transformation, especially innovation in artificial intelligence and the growth of small and medium-sized enterprises. According to the survey, these sectors will be instrumental in providing long-term stability and advancement of the economy.

Against the backdrop of a slowing global economy due to geopolitical tensions, ongoing conflicts and trade policy, Budget 2025 is expected to provide a boost to the Indian economy and the country’s global competitiveness by focusing on the following areas:

• Taxation;
• Power sector;
• Urban development;
• Mining;
• Financial sector; and
• Regulatory reforms.

Budget 2025 does not propose any rate changes for companies, nor does it address whether and when India will introduce a global minimum tax under the OECD Pillar Two initiative. However, in line with its vision of Viksit Bharat (the “develop India” initiative), the government has proposed a new simplified direct tax code that would ensure greater clarity, tax certainty and ultimately reduce litigation. A draft code is expected in the short term and budget 2025 already contains proposed changes to the new code.

Provisions Impacting the Taxation of Nonresidents

• Harmonisation of Significant Economic Presence (SEP): SEP provisions in India’s domestic tax laws tax online transactions and include within their scope transactions for the purchase or sale of any goods. The SEP rules expand the scope for taxing income derived by nonresidents doing business in India by deeming nonresidents with a SEP in India to have a “business connection” (a concept broader than a permanent establishment) with the country and thus be subject to tax in India. An SEP can be established where a nonresident enterprise has purposeful and sustained interactions with India by using technology and other automated tools. Under the current tax framework, income arising from goods purchased by nonresidents is outside the scope of a business connection if the goods were purchased for subsequent export, but a similar exemption is not available in the case of an SEP. Budget 2025 proposes to harmonise the applicability of the SEP and business connection provisions in this regard—transactions that are limited to the purchase of goods to be exported would not create an SEP.
• Presumptive taxation for nonresidents in electronics system design and manufacturing: To promote the electronics and IT sectors, a new presumptive taxation regime is proposed to be introduced for nonresidents that provide services or technology to specified Indian companies for setting up electronics manufacturing facilities in India. Under the presumptive taxation scheme, 25% of the aggregate amount received/receivable or paid/payable would be deemed to be profits and gains from a business taxable in the hands of the nonresident, which would be taxable as business income. The 25% presumptive tax would result in an effective tax rate of 8.75% (excluding the surcharge and education cess).  
• Extension of time limit for tax benefits to start-ups: The last date to incorporate an eligible start-up for claiming a tax holiday is proposed to be extended by five years. Accordingly, a start-up incorporated on or before 31 March 2030 would be eligible to claim a 100% tax deduction on profits for three consecutive fiscal years out of 10 years, provided certain conditions are satisfied.
• Rationalisation of capital gains tax for specified funds or foreign institutional investors (FIIs): The tax rate on long-term capital gains arising from the transfer of capital assets was increased from 10% to 12.5% under Finance Act 2024. However, this increase was not applicable to specified funds or FIIs, so the budget proposes to extend the application of the 12.5% tax rate to such funds/FIIs.

International Financial Services Centre (IFSC) Incentives

The Indian government offers income tax incentives to encourage the setting up of units in an IFSC. To facilitate the continued promotion of such investments and to incentivise businesses, the following tax incentives are proposed for units operating in an IFSC:

• The sunset date for the commencement of operations of IFSC units to benefit from tax concessions is proposed to be extended to 31 March 2030.
• Any amount (including bonus) received by a nonresident from an IFSC insurance company under a life insurance policy would be tax-exempt without any conditions relating to the premiums payable on such policies. 
• Qualifying nonresidents or units of an IFSC engaged in ship leasing would be granted a tax exemption on capital gains and dividend income arising from that IFSC.
• An advance or loan between two group entities where one entity is a “finance company” or “finance unit” in an IFSC and is set up as a global or regional corporate treasury centre for undertaking treasury activities or treasury services and the parent or principal entity of the group is listed on a stock exchange outside India would not be treated as a dividend.
• Certain conditions for fund managers located in an IFSC would be relaxed.
• Income accrued or received by a non-resident from the transfer of specified derivative instruments, etc. from foreign portfolio investors that are an IFSC unit would be exempt from income tax.

Rationalisation and Simplification

• Extension of the time to file an updated return: Finance Act 2022 introduced an option for taxpayers to file an updated tax return within 36 months from the end of the relevant tax year (for prior coverage, see the article in the February 2022 issue of Corporate Tax News). This facility assisted taxpayers with correcting errors or omissions in previously filed tax returns which they were unable to correct because the nine-month filing deadline had expired. To encourage voluntary compliance, the budget proposes to extend the time limit from 36 months to 60 months.
• Taxation and reporting of crypto assets: Crypto assets are proposed to be brought within the scope of virtual digital assets (VDA) and thereby allowing India to tax income arising therefrom. It is also proposed to introduce a requirement for certain entities to report information on crypto asset transactions to the tax authorities.
• Multi-year arm’s length price determination and expansion of safe harbour rules: The budget includes a proposal to introduce a progressive approach in transfer pricing assessments by determining the arm’s length price covering three consecutive years. This proposal seeks to streamline the transfer pricing assessment process and offer a multi-year approach where companies engaging in transactions with their group entities can opt for an arm’s length principle determination for three consecutive years rather than for each year. Furthermore, it is proposed that the scope of the safe harbour rules would be expanded.

Other Regulatory Proposals

The foreign direct investment (FDI) rules for the insurance sector would be eased by increasing FDI in India’s insurance sector from 74% to 100% for companies that invest all their premiums in India. Additionally, the existing regulations and conditions related to FDI would be reviewed and streamlined. Both measures are expected to attract more foreign investment in the sector.

Finally, to promote and protect foreign investment with countries that have concluded a bilateral investment treaty with India, it is proposed to revamp the BIT and make it more investor friendly.

BDO Insight

Overall, Budget 2025 tries to boost growth and is focused on reforms. With a focus on promoting and attracting foreign investment in India, the budget proposes the expansion of tax benefits to IFSCs. Further, by providing an effective tax rate of 8.75% (excluding the surcharge and education cess), the government is trying to woo nonresidents to help Indian electronic manufacturers by making available advanced knowledge, and thereby further boosting the government’s ‘Make in India’ initiative.

While the budget is tabled in parliament and will go through the lower and upper house and be approved by the president before it becomes law, the new income tax law is also to be tabled soon. Once the new tax bill is tabled, taxpayers will have to evaluate its impact on their activities and businesses.

Jagat Mehta
Mihir Gandhi
Shilpa Sethia
BDO in India