NITI Aayog proposes optional presumptive taxation to cut disputes for foreign firms

In a move aimed at reducing tax litigation and reducing compliance with foreign companies, Niti aayog suggested entering an optional virtual tax system for multinationals operating in India. Recommendation features in the first Think Tank paper in the new tax policy works chain, which was released on Friday.

India has obtained approximately $ 1.07 trillion of cumulative foreign direct investment (FDI) between April 2000 and March 2025. However, ongoing conflicts were created on the definition of “Permanent Institution” (PE) and a long -term profit agreement for foreign investors. According to the paper, this ambiguity led to frequent and lengthening litigation, deterring potential investment and increasing compliance costs.

The proposed frame

Under the proposed scheme, foreign companies will have the option to pay taxes based on a specific specific percentage of the sector of their total revenues from India. Those who choose will get the protection of a “safe port”, while the tax authorities refrain from challenging them separately for the presence of PE for this activity. This would reduce companies from maintaining detailed local accounts and reducing disputes.

Decally, the scheme is not compulsory. Companies whose actual profits are less than the supposed number may continue under the regular tax system.

“The paper offers a convincing image of the opportunities available in improving our approach in permanent institutions,” said BVR Subrahmanyam, CEO of Niti Aayog. “By providing more clarity and ability to predict our tax regulations, India is preparing to attract large foreign investments and encourage multinationals based on expansion.”

SubrahManyam added that this procedure will be particularly relevant to digital and technological companies, which have witnessed the most relevant conflicts in PE in recent years. He said that the supposed optional path can significantly reduce litigation in this sector.

Wide recommendations

The worksheet also calls for writing the bases of PE and profit within local law, and its compatibility with international standards. Additional measures include the inclusion of binding arbitration to resolve disputes and invest in training tax employees to ensure an increase in consistency in the interpretation.

Industrial reactions

Tax experts welcomed the suggestion as a pragmatic step forward. Sandeep Jhunjhunwala, the M & A tax partner in Nanganxt, noted that the scope of PE’s disputes has expanded largely in recent years, including PES, Service Pes, digital presence and approved agent models.

“The supposed optional tax plan proposed to impose income tax is within 5-30 % of the total total revenue for sources in India via the vertical industry, while providing the cancellation of the subscription, is a welcome proposal,” said Jhunjhunala Business Standard. “By ensuring that the Indian tax authorities will not sue separately if the company chooses the supposed taxes, the framework provides the certainty that affects the need and avoid the PE threshold discussion.”