Govt plans tax relief for offshore funds, electronics’ contract manufacturing

Why in the News?

The government has circulated the Taxation and Other Laws (Amendment) Bill, 2026, which relaxes the conditions under which offshore funds managed from India can claim tax exemption. The Bill also extends a tax exemption for foreign firms supplying equipment to electronics contract manufacturers and introduces a fresh tax holiday for rough-diamond trading in a notified zone. The measures respond to foreign outflows and to lobbying by manufacturers seeking tax certainty.

What is the Taxation and Other Laws (Amendment) Bill 2026?

1. Purpose: The Bill amends the Income-tax Act to promote fund management activity and provide tax certainty to specified foreign and offshore entities. It bundles relief for offshore funds, electronics contract manufacturing and rough-diamond trading.
2. Replaces an Ordinance: The Bill replaces the Income-tax (Amendment) Ordinance, 2026 promulgated on 5 June, which had exempted foreign portfolio investors from capital gains and withholding taxes on government securities. The Ordinance was brought amid pressure on the rupee and foreign outflows.

What is an Eligible Investment Fund (offshore fund)?

1. Definition: An Eligible Investment Fund is an offshore pooled investment vehicle that can be managed by a fund manager based in India without the fund itself being treated as having a taxable business presence in India.
2. Why the safe harbour matters: Without the exemption, the manager’s activity in India could create a business connection, exposing the fund’s global income to Indian tax at rates of up to 38%.

Key Rules for an Eligible Investment Fund

1. Outside Location: The fund must be created, registered, or incorporated outside the host country (for example, outside India).
2. Non-Resident Status: The fund and its general members must live or reside outside the target country.
3. Member Limits: It usually needs a minimum number of members (such as 25 non-connected investors) so that it is a true public or pooled vehicle and not controlled by a single family or small group.
4. Diverse Ownership: No single member or direct group can hold a massive stake (usually restricted below 10% or 20% depending on precise tax codes) to prevent individual dominance

How does the Bill ease conditions for offshore funds?

1. Fewer conditions to qualify: The government proposes to remove 8 of the 13 conditions that offshore funds must meet so their activity does not constitute business income in India. Only five conditions would remain.
2. Dropped thresholds: Removed conditions include a minimum of 25 investors, a maximum 10% interest for a single investor, a cap on investing more than 25% of the corpus in one entity, and a minimum monthly average corpus of Rs 100 crore.
3. Remaining conditions: The fund must not be a resident of India and must not control or manage any business in India. Direct investment by Indian residents must not exceed 5% of the corpus on 1 April and 1 October of the tax year.
4. Intended effect: Aligning safe-harbour rules with global fund structures aims to relocate offshore fund management activity to India and to unify the framework with the International Financial Services Centre (IFSC).

What relief goes to electronics contract manufacturing?

1. Extended exemption to FY41: Tax exemption for a foreign company that provides capital goods, equipment or tooling to a contract manufacturer of electronics in India is extended to tax year 2040-41, from the earlier 2030-31. The exemption was first introduced earlier in the year, valid only to 2031.
2. Why it was sought: A major device maker lobbied for the change, fearing that ownership of high-end machinery supplied to contract manufacturers would be treated as a business connection and expose its profits to Indian tax, unlike in China.
3. Scope of devices: The exemption applies to makers of mobile phones, tablets, laptops, hearing and wearable electronic devices. India is set to make 26% of the world’s iPhones in 2026, up from 6% four years earlier.
4. Storage of components: Foreign firms’ income from storing and providing parts to contract manufacturers is exempt until 2041, applying to factories and warehouses in customs-bonded areas treated as outside the customs border.

What is the rough-diamond tax holiday?

1. Fifteen-year holiday: A new tax holiday of 15 years up to 31 March 2041 is proposed for specified foreign companies acting as mining companies, sightholders, brokers, aggregators and tender or auction entities. It exempts their income from the sale of rough diamonds in a notified special zone in India.
2. Objective: The measure aims to bring rough-diamond trading, currently routed through overseas centres, into a notified Indian zone.

What are the challenges to the tax-relief package?

1. Revenue foregone: Long-dated exemptions to 2041 lock in a loss of tax revenue over more than a decade, with benefits concentrated among large foreign firms.
2. Selective advantage: Relief tailored to a single dominant electronics buyer raises questions of a level playing field for smaller manufacturers.
3. Uncertain relocation gains: Easing offshore-fund conditions may not by itself pull managers to India if enforcement and dispute practices remain aggressive.
4. Base-erosion concern: Broad exemptions on cross-border income invite scrutiny over profit shifting through bonded zones and notified special zones.

Conclusion

The Bill uses targeted, long-dated tax exemptions to keep foreign capital and electronics manufacturing anchored in India while replacing a June Ordinance on government-securities taxation. Its success depends on whether removing safe-harbour conditions genuinely relocates fund management to India and whether the electronics concessions deepen domestic value addition rather than mere assembly. The Bill is expected to be introduced in Parliament during the week.

Back2Basics

1. Eligible Investment Fund: An offshore fund permitted to be managed from India without creating a taxable business connection, subject to safe-harbour conditions under the Income-tax Act.
2. Foreign Portfolio Investor (FPI): An overseas investor registered with the Securities and Exchange Board of India to invest in Indian securities.
3. International Financial Services Centre (IFSC): A jurisdiction, such as GIFT City in Gujarat, that provides financial services to non-residents in foreign currency under a distinct regulatory regime.
4. Contract manufacturing: Production by a third-party manufacturer of goods for a brand owner, common in electronics assembly.
5. Customs-bonded area: A warehouse or factory treated as outside India’s customs border, where import duty is deferred until goods enter the domestic market.

PYQ Relevance

[UPSC 2019] Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

(a) Certificate of Deposit (b) Commercial Paper (c) Promissory Note (d) Participatory Note

Answer: (d)