New Presumptive Taxation Scheme for Non-Residents    

To provide tax certainty and promote the growth of the electronics manufacturing industry, the government has proposed a new presumptive taxation scheme under Section 44BBD of the Income Tax Act, 1961. This scheme specifically applies to non-resident companies engaged in providing services or technology in India, particularly in relation to setting up or operating electronics manufacturing facilities. By introducing this scheme, the government aims to simplify tax compliance for foreign entities while encouraging their participation in India's growing electronics sector. In this article, we will look into the New Presumptive Taxation Scheme for Non-Residents in detail.

What is Presumptive Taxation?

Presumptive taxation is a simplified method of taxation where income is calculated based on a fixed percentage of gross receipts or turnover rather than requiring taxpayers to maintain detailed books of accounts and compute actual profits. This approach reduces compliance burdens and provides tax certainty, especially for small businesses and specific categories of taxpayers.

The Income Tax Act, 1961, includes several presumptive taxation schemes, such as:

• Section 44AD – Applicable to small businesses.
• Section 44ADA – Applicable to professionals.
• Section 44AE – Applicable to transport businesses.

As part of the Union Budget 2025, a new Section 44BBD has been proposed to be inserted after Section 44BBC in the Income Tax Act, 1961.

Government Initiatives to Promote Electronics Manufacturing

In recent years, India has introduced several schemes to promote establishing semiconductor and display manufacturing facilities, aiming to position the country as a global hub for electronic system design and manufacturing. These initiatives have provided fiscal support for setting up facilities and granted customs duty exemptions for specific product categories.

In the Union Budget 2025, an amendment to income tax laws has been proposed to further boost the industry by ensuring tax certainty for non-residents. This includes the introduction of a new presumptive taxation scheme for non-residents providing services or technology in India for setting up electronics manufacturing facilities or producing electronic goods.

New Presumptive Tax Scheme for Non-Residents

The Union Budget 2025 has proposed the introduction of a new presumptive taxation scheme under Section 44BBD of the Income Tax Act, 1961 (‘Act’). This scheme aims to provide tax certainty for non-residents engaged in the electronics manufacturing sector in India. By offering a simplified taxation mechanism, the government seeks to encourage foreign participation in setting up and operating electronics manufacturing facilities in the country.  

The objective of the Scheme

The primary objective of the proposed presumptive taxation scheme under Section 44BBD is to support India's vision of becoming a global hub for Electronics System Design and Manufacturing (ESDM).

Who Will Benefit from the New Presumptive Tax Scheme?

The proposed Section 44BBD will primarily benefit non-resident entities that provide services or technology to a resident company engaged in electronics manufacturing in India.

New Presumptive Tax Scheme Applicability

The section applies to non-residents engaged in the business of providing services or technology in India.

These services must be related to either:

• Setting up an electronics manufacturing facility or
• Manufacturing or producing electronic goods, articles, or related items in India.

Eligible Criteria for New Presumptive Tax Scheme

For the presumptive taxation scheme under Section 44BBD to apply, the following conditions must be met:

• The non-resident must provide services to a resident company that is:
• Establishing or operating an electronics manufacturing facility or a connected facility.
• Operating under a scheme notified by the Central Government, specifically under the Ministry of Electronics and Information Technology.

The resident company must meet the prescribed conditions to qualify for availing services under this scheme.

Presumptive Taxation Basis

Under the scheme, 25% of the total amount received or receivable by the non-resident for providing services or technology will be deemed as taxable profits.

These amounts include:

• Payments are made to the non-resident directly or to any person on their behalf.
• Amounts received or deemed to be received by the non-resident in relation to these services.

Restrictions on Set-Off of Losses

Non-residents opting for this new presumptive taxation scheme will not be allowed to set off unabsorbed depreciation or carry forward business losses against their presumptive income.

Non-residents opting for this scheme cannot claim set-off of:

• Unabsorbed depreciation under Section 32(2).
• Brought forward business losses under Section 72(1).

This means that even if a non-resident incurs losses or lower profits, they will still be taxed on 25% of gross receipts, ensuring tax certainty.

Effective Tax Rate Under the New Presumptive Taxation Scheme

Under the proposed Section 44BBD, 25% of the total amount received by the non-resident for these services will be considered as taxable profits. As a result, the effective tax liability for non-residents under this scheme will be less than 10% of their gross receipts, providing a simplified and predictable tax framework.

Effective Date

The proposed amendment under Section 44BBD will come into effect from April 1, 2026, and will be applicable for the Assessment Year (AY) 2026-27 onwards. This means that the provisions of the new presumptive taxation scheme will impact income earned by non-residents from the Financial Year (FY) 2025-26 onwards. 

New Presumptive Tax Scheme for Non-Residents: Optional or Mandatory?

The wording of the proposed scheme under Section 44BBD indicates that it is mandatory for all non-residents falling under its scope to pay tax based on the deemed income. Unlike other presumptive taxation schemes, non-residents covered under this provision do not have the option to be taxed under the standard income tax provisions.

This contrasts existing presumptive tax schemes in the Income Tax Act, such as Section 44AD, which applies to specific businesses, and Section 44ADA, which applies to professionals. In these schemes, eligible taxpayers can choose between the presumptive tax regime and the regular taxation system, depending on which is more beneficial.

Since Section 44BBD is mandatory, it could create challenges for non-residents who have incurred losses or earned a lower net income. Even in such cases, they would still be required to pay tax under the presumptive scheme based on the profit percentage, potentially leading to a higher tax burden than the standard provisions.

Given this constraint, non-resident service providers may consider availing the benefit of tax treaties. Under Article 7 of most tax treaties, business income is generally taxed on a net income basis, which could allow non-residents to pay tax only on actual profits rather than a deemed percentage of gross receipts. This could provide relief in cases where actual profits are lower than the presumptive income calculated under the proposed scheme.

Conclusion

The introduction of the presumptive taxation scheme under Section 44BBD marks a significant step toward ensuring tax certainty and simplifying compliance for non-residents providing services or technology in India's electronics manufacturing sector. By deeming 25% of gross receipts as taxable income, the scheme offers a streamlined tax structure while supporting the government's vision of making India a global hub for Electronics System Design and Manufacturing (ESDM).

FAQs on the New Presumptive Taxation Scheme for Non-Residents 

1. What is the new presumptive taxation scheme under Section 44BBD?

The government has introduced a new presumptive taxation scheme under Section 44BBD of the Income Tax Act, 1961, to provide tax certainty for non-residents offering services or technology for setting up or operating electronics manufacturing facilities in India.

2. Who is eligible for this scheme?

The scheme applies to non-resident entities engaged in providing services or technology to a resident company that is establishing or operating an electronics manufacturing facility under a notified government scheme.

3. How is taxable income calculated under this scheme?

Under Section 44BBD, 25% of the total amount received or receivable by the non-resident for providing services or technology will be deemed as taxable income.

4. What is the effective tax rate under this scheme?

The effective tax liability for non-residents under Section 44BBD is estimated to be less than 10% of their gross receipts, simplifying tax compliance.

5. Is this scheme mandatory for non-residents?

Yes, the scheme is mandatory for all eligible non-residents. They cannot opt-out and choose to be taxed under regular income tax provisions.

6. Can non-residents set off losses or unabsorbed depreciation under this scheme?

No, non-residents opting for Section 44BBD cannot set off unabsorbed depreciation or carry forward business losses against their presumptive income.

7. When will this scheme come into effect?

The new scheme under Section 44BBD will be effective from April 1, 2026, and applicable for Assessment Year (AY) 2026-27 onwards.

8. What if a non-resident has lower profits or incurs losses?

Even if a non-resident has lower actual profits or losses, they will still be taxed on 25% of their gross receipts under this scheme. However, they may explore tax treaty benefits to determine if they can opt for a net basis taxation under the applicable treaty.

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