NITI Aayog proposes optional presumptive taxation to cut disputes for foreign firms

In a move aimed at reducing tax litigation and easing compliance for foreign businesses, NITI Aayog has proposed the introduction of an optional presumptive taxation regime for multinational corporations operating in India. The recommendation features in the think tank’s first paper under its new Tax Policy Working Paper Series, released on Friday.

India has received nearly USD 1.07 trillion in cumulative foreign direct investment (FDI) between April 2000 and March 2025. However, persistent disputes around the definition of “permanent establishment” (PE) and profit attribution have long created uncertainty for foreign investors. According to the paper, this ambiguity has led to frequent and protracted litigation, deterring potential investment and driving up compliance costs.

Proposed framework

Under the suggested scheme, foreign companies would have the option to pay taxes based on a predefined, sector-specific percentage of their gross revenues sourced from India. Those opting in would gain “safe harbour” protection, with tax authorities refraining from separately challenging the existence of a PE for that activity. This would relieve firms from maintaining detailed local accounts and reduce the scope of disputes.

Crucially, the scheme is not mandatory. Companies that believe their actual profits are lower than the presumptive figure may continue under the regular taxation regime.

“The paper presents a compelling picture of the opportunities available in refining our approach to permanent establishments,” said B V R Subrahmanyam, CEO of NITI Aayog. “By providing greater clarity and predictability in our tax regulations, India is poised to attract substantial new foreign investment and encourage existing multinational corporations to expand.”

Subrahmanyam added that the measure would be particularly relevant to digital and technology companies, which have seen the most PE-related disputes in recent years. The optional presumptive route, he said, could significantly reduce litigation in this sector.

Wider recommendations

The working paper also advocates codifying PE and profit attribution rules within domestic law, aligning them with global norms. Additional measures include introducing binding arbitration for dispute resolution and investing in the training of tax officers to ensure greater consistency in interpretation.

Industry reactions

Tax experts have welcomed the proposal as a pragmatic step forward. Sandeep Jhunjhunwala, M&A Tax Partner at NangiaNXT, noted that the scope of PE disputes has widened considerably in recent years, encompassing agency PEs, service PEs, digital presence, and dependent agent models.

“The proposed optional presumptive taxation scheme of levying income tax in the range of 5–30% of India-sourced gross revenue across industry verticals, with an opt-out provision, is a welcome proposition,” Jhunjhunwala told Business Standard. “By ensuring that Indian tax authorities will not separately litigate the existence of a PE if a company opts for presumptive taxation, the framework provides much-needed certainty and sidesteps the PE threshold debate.”