Daijiworld Media Network – New Delhi
New Delhi, Jan 21: The Union Government is considering a major overhaul of its permanent establishment (PE) taxation framework, reviving a long-pending proposal to introduce a formula-based method for attributing profits to non-resident enterprises operating in India, sources familiar with the matter said.
The move comes amid delays in global negotiations under the OECD’s Pillar One framework, prompting authorities to explore domestic options that protect India’s taxing rights while providing clarity and certainty for multinational and digital firms.
A senior government official told media, “There is a need to give better clarity for both definition and profit determination for permanent establishments, especially for digital companies. The government is weighing all domestic options to safeguard India’s taxing rights, offer tax certainty, and reduce litigation.”
Under the proposed framework, multinational groups operating via Indian affiliates would receive a safe harbour if the Indian entity had already been fully compensated at arm’s length. Payments received directly by the foreign enterprise from Indian residents up to Rs 10 lakh would not attract additional profit attribution in India.
For payments exceeding this threshold, profits would be re-attributed to India using a prescribed formula. To prevent double taxation, credits would be allowed for profits already taxed in the hands of the Indian affiliate. Employees and assets of the Indian affiliate would also be considered part of the Indian operations of the foreign enterprise for attribution purposes.
The committee has recommended implementing these changes through amendments to Rule 10 of the Income Tax Rules, which governs profit attribution in cases of business connection and permanent establishment, with clear definitions to prevent ambiguity, particularly for digital firms such as data centres.
This initiative is seen as a step toward providing greater certainty to foreign enterprises while ensuring India’s rightful share of tax revenue from cross-border business activities.