India’s Budget Seeks to Boost Foreign Business Investment: CLA #IndiaFinance

India’s Union Budget 2025-26 is a bold step towards transforming India’s economic landscape. Focusing on reducing the tax burden for middle-income taxpayers, this budget aims to invigorate consumption, attract foreign investment, and provide fiscal stability.

As India continues its journey toward becoming a global economic powerhouse, these reforms play a crucial role in fostering sustainable growth. Explore the new reforms affecting organizations conducting business in India.

U.S. business investment in India considerations

India’s budget reforms especially seek to increase foreign investment (get details below on changed foreign direct investment rules). As the most populous country in the world, it’s a prime market for U.S. goods and services. And with current tariffs on goods from China, Mexico, and Canada, India may be a location to consider for manufacturing.

The Union Budget 2025-26 introduces several key tax and policy reforms that could benefit U.S. clients with investments or business operations in India. The increase in the Foreign Direct Investment (FDI) limit in the insurance sector to 100% (for those companies investing the entire premium in India) presents a lucrative opportunity for U.S. insurance firms looking for full ownership in Indian ventures.
Source: Government of India, Ministry of Finance

Additionally, the simplified compliance rules for global treasury centers and investment funds in the International Financial Services Centre (IFSC), including Gujarat International Finance Tech-City (GIFT city), make India a more attractive destination for financial firms.

The budget also introduces tax benefits for start-ups, fostering a more supportive environment for innovation and entrepreneurship. These incentives could help U.S. investors looking to enter or expand in India’s growing start-up ecosystem. Overall, the budget aims to boost India’s economic growth while providing foreign investors with improved regulatory clarity and market access.

India’s Union Budget 2025-26: Tax reforms for economic growth

The Union Budget 2025-26 focuses on reducing the tax burden and compliance on the middle-income taxpayers with an aim to boost consumption, attract foreign capital, and provide fiscal stability.

Highlights of the key tax proposals are:

Corporate taxation

• Corporate tax rate for domestic companies and foreign companies remains unchanged at 25% and 35%, respectively, (plus surcharge and cess).
• Start-ups incorporated before April 1, 2030, continue to benefit from a three-year tax holiday within the first 10 years of operation, provided they meet certain conditions.
• Non-residents providing services or technology for notified electronics manufacturing in India, will be taxed on 25% of their gross receipts.
• Inland vessels registered under the Indian Vessels Act, 2021, now benefit from the tonnage tax regime where tax is calculated based on the net tonnage (capacity) of vessels instead of actual profits.

Explore more: India market entry: Challenges and opportunities webinar

Transfer pricing

• Transfer pricing audits can be assessed in blocks of three financial years instead of annually, if opted by the taxpayer.
• Taxpayers can apply the arm’s-length price determined for previous international and specified domestic transactions to similar transactions for the next two years, except in search cases, with prescribed time limits and procedures.

FDI and foreign institutional investment (FII)

• The insurance sector’s FDI limit has been increased from 74% to 100%, allowing complete foreign ownership, provided the premiums earned are reinvested in India.
• Income from ship leasing, dividends between IFSC units engaged in ship leasing, and life insurance proceeds from policies purchased through IFSC insurance intermediaries, including those in GIFT city, are exempt from tax.
• Simplified compliance rules are introduced for global treasury centers and investment funds in the IFSC, including GIFT city, to enhance its position as a global financial hub.
• Long-term capital gains tax on listed bonds, debentures, and non-equity mutual fund units held by FIIs has been raised from 10% to 12.5%, effective April 1, 2026.

Compliance related reforms

• The timeline for filing an updated tax return has been extended from two years to four years from the end of the relevant assessment year.
• The definition of virtual digital assets now includes all crypto assets, and reporting of crypto transactions to tax authorities is mandatory.

Goods and services tax (GST) reforms

• Input service distributor (ISD) now includes interstate reverse charge mechanism (RCM) transactions and ISD liable to RCM.
• The Supreme Court ruled “plant or machinery” under Section 17(5)(d) is different from “plant and machinery” and requires a functional test to determine if a building qualifies as a “plant,” leading to a proposal to replace “plant or machinery” with “plant and machinery” for clarity.
• A track and trace mechanism has been introduced for specified goods with a unique identification mark to combat tax evasion and enhance supply chain transparency.
• Transactions involving goods stored in Special Economic Zones or Free Trade Warehousing Zones before export or clearance to the Domestic Tariff Area will be treated as neither a supply of goods nor a supply of services.
• Violations of unique identification marking requirements, which mandate secure and nonremovable marks on certain goods to prevent tax evasion and fraud, can result in strict penalties.

How CLA can help with foreign business considerations in India

India’s new budget appears friendly to foreign business investment but sometimes the challenges lie in the details. CLA’s international tax team can guide you through the maze of India’s tax regulations, providing compliance and strategic tax planning for your global operations.

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