Mr. Uday Ved (Tax Leader, KNAV) and Ms. Wrutuja Soni (Senior Manager) provide valuable insights on the aforesaid insertion while outlining pertinent questions / issues that arise from the draft Section 44BBD, from the point of view of both taxpayers and consultants. The authors inter alia highlight that, while Section 44BB specifically excludes Section 115A, there is no such exclusion in draft of Section 44BBD, which implies that even if the nature of receipts is fees for technical services or royalty, the presumptive taxation u/s 44BBD should still be applicable. Finally, they conclude by remarking that, “The Ministry of Finance / Central Board of Direct Tax may issue a clarification on the above issues to ensure that the section is effectively beneficial.”

“Presumptive Taxation for Non-Residents u/s 44BBD - Advantages vs. Drawbacks”

Presumptive Taxation for Non-Residents Providing Services/Technology to Electronics Manufacturing Facilities in India - Advantages vs. Drawbacks

In order to ensure certainty and promotion of Electronics systems design and manufacturing industry, the Finance Bill, 2025 proposes to introduce presumptive taxation through a new section 44BBD of the Income Tax Act, 1961 (‘the IT Act’) with effect from 1st April 2026 (FY 2025-26 i.e. AY 2026-27), for non-residents engaged in the business of providing services or technology,

• To a resident company that is setting up or operating an electronics manufacturing facility, or a connected facility for manufacturing or producing electronic goods, article or thing in India, under a scheme notified by the Central Government in the Ministry of Electronics and Information Technology; and

• The resident company satisfies the conditions specified in the prescribed rules.

Section 44BBD of the IT Act deems 25% of the aggregate amount received / receivable by, or paid / payable to, the non-resident, on account of providing services or technology, is proposed as profits and gains of such non-resident from this business. The applicable tax rate will be 35% (assume a foreign company) plus surcharge and cess, which will result into an effective tax payable of less than 10% on gross receipts, by the non-resident.

It is also proposed that those non-residents who are covered under this section would not get the benefit of set off of unabsorbed depreciation or brought forward losses.

Few questions / issues arise from the draft section 44BBD of the Income Tax Act, 1961 outlined below -

Q1: The resident company may engage the non-resident either directly or through a contractor/sub-contractor. It is unclear whether the presumptive taxation will apply in the case of engagement through a contractor/sub-contractor, or if it will only apply when the non-resident is directly engaged by the resident company?

A1:   It may be noted that the wording of Section 44BB, which deals with oil and gas, appears broader and seems to cover a non-resident providing services to anyone. In contrast, the wording of Section 44BBD seems more restrictive. This raises the question of whether only a direct engagement with the resident company is covered under presumptive taxation, and whether engagement through a contractor or sub-contractor is excluded. This may require further clarification in the provisions of Section 44BBD.

Q2: The non-resident is required to provide ‘services or technology’ as per the proposed provisions of section 44BBD. What types of services can be provided by the non-resident to qualify for the benefits under section 44BBD? Do the services need to be of a technical nature specifically?

A2: The provision uses the term ‘services’ without specifying ‘technical or skilled services’, which implies that it could encompass other types of services such as consulting, managerial, legal, accounting, sales, and marketing support services. This would apply if these services are primarily intended for establishing or operating an electronics manufacturing facility or are related to the manufacturing or production of electronic goods, articles, or things in India.

Q3: Will it be mandatory for a non-resident to be subject to presumptive taxation, or if their income is lower than the presumptive income, can they opt for taxation based on net income instead?

A3: Unlike section 44BBB of the Income Tax Act, this section does not allow the option to declare lower profits by maintaining books of account and submitting a tax audit report. One could argue that the taxpayer should have the choice to opt between presumptive taxation or net income taxation, as relevant. The principle set forth in the decision of Hon’ble Supreme Court in case of A. Sanyasi Rao[1] should be applicable.

Q4: Will the provisions of section 9(1)(vi) and 9(1)(vii) read with section 115A, which deal with fees for technical services and royalty, override the provisions of section 44BBD?

A4: While Section 44BB specifically excludes Section 115A, there is no such exclusion in draft of Section 44BBD. This implies that even if the nature of receipts is fees for technical services or royalty, the presumptive taxation under section 44BBD should still be applicable.

Q5: What will be the treatment of the 'equalisation levy' under Section 44BBD? Will it apply in addition to or instead of presumptive taxation?

A5: This may be applicable if the services fall within the scope of the 'equalisation levy'. However, considering the nature of the services, it is likely that the equalisation levy may not apply.

Q6: Whether the non-resident be required to maintain books of account, undergo tax audit and comply with transfer pricing regulations under Section 92 (such as local file, master file, Country by Country reporting (CbCr))?

A6: The proposed provisions of section 44BBD overrides provisions of section 28 to section 43A of the IT Act. Thus, technically, the provisions dealing with maintenance of accounts (section 44AA), tax audit (section 44AB) and transfer pricing regulations (section 92) are not waved. However, It can be argued that if an assessee opts for presumptive taxation (assuming the assessee has the choice), then such requirements mentioned above should be dispensed with. If the assessee (non-resident) chooses to be taxed based on net income, these requirements should apply. Nevertheless, there is no clarity on this matter in the draft of Section 44BBD.

Q7: Will the provisions of Section 44BBD apply to non-residents providing technical services who have a business connection or permanent establishment in India, or will it be applicable to all non-residents engaged in providing services or technology in India through an independent domestic company or contractor involved in such business?

A7: A plain reading of the proposed provision indicates that it would apply only to non-residents engaged in the business of providing services or technology in India, specifically those who have a business connection or a Permanent Establishment (PE) in India. However, the question remains whether the taxable income under Section 44BBD could be regarded as part of the PE attribution in India, or whether it would be in addition to the taxable income attributed to the PE in India.

Q8: What will be the withholding tax rate at the time of payment for services received by Indian businesses from non-residents opting for the provisions of section 44BBD of the IT Act?

A8: The first schedule to the Finance Bill, 2025 does not specify a particular withholding tax rate for an Indian company engaged in a specified manufacturing facility when receiving services or technology from a non-resident. In such cases, the tax deduction may be made at the highest rate of 20% if the non-resident does not have a PAN in India, at the time of credit or payment, whichever is earlier. If the non-resident has a PAN, the applicable TDS rate could be determined based on the relevant provisions of the IT Act or relevant DTAA or any other applicable rules.

The Ministry of Finance / Central Board of Direct Tax may issue a clarification on the above issues to ensure that the section is effectively beneficial.