Section 44BBD: New Presumptive Tax Regime for Non-Residents

Complete Understanding of Section 44BBD of the Income-tax Act, 1961 – New Presumptive Tax Regime for Non-Residents

Introduction 

The Finance Bill, 2025, introduces Section 44BBD, which establishes a presumptive taxation regime for non-resident entities providing technology and services to Indian companies operating in the electronics manufacturing sector. This move simplifies tax compliance for foreign entities supporting India’s Electronics System Design and Manufacturing (ESDM) ecosystem, particularly in semiconductor and display manufacturing.  Key Features of Section 44BBD

Applicability of Section 44BBD:

Non-resident entities providing technology or services to Indian electronics manufacturing companies. The recipient Indian company must be operating under a government-notified scheme by the Ministry of Electronics and Information Technology (MeitY). Effective Date : Applies from AY 2026-27 (i.e., from April 1, 2026, onwards). 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.

Target Audience : Applies to non-resident companies supplying services or technology to resident companies in India. These resident companies must be engaged in setting up or operating electronics manufacturing facilities.

Government-Notified Scheme : The electronics manufacturing facilities must be covered under a scheme notified by the Ministry of Electronics and Information Technology (MeitY). They must also fulfill prescribed conditions to be eligible.

• 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

Presumptive Taxation Framework : 25% of total payments received or receivable by the non-resident for such technology/services is deemed as taxable business income in India. Overrides usual business income provisions under Sections 28 to 43A of the Income-tax Act. 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.

Presumptive Taxation Basis-—Restrictions on Deductions:

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

• Unabsorbed depreciation under Section 32(2): No deductions are allowed for unabsorbed depreciation or carried forward losses.
• Brought forward business losses under Section 72(1): No set-off of unabsorbed depreciation and brought-forward losses. And also ensures fixed and simplified taxation without additional adjustments.

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 and a fixed percentage of gross receipts (to be prescribed) is deemed as taxable income. So we can say that 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.

Benefits & Implications of Section 44BBD

• Simplifies compliance for foreign companies by eliminating complex calculations.
• Provides clarity on taxation and avoids disputes over applicability of different tax sections.
• Promotes foreign investment in India’s electronics manufacturing sector.
• Ensures certainty by excluding the applicability of Sections 44DA and 115A, preventing tax overlap.

Proposed Amendment & Interplay with Other Sections

Another change is that in newly introduced s. 44BBD for electronics manufacturing ( 25% presumptive income ) a proviso has been inserted that s. 44DA and 115A shall not be applicable. Hence no controversy like on 44BB where Revenue still contesting provision of Section 44DA to override section 44BB of the Act. The amendment clarifies that income under Section 44BBD will not be taxed under Sections 44DA or 115A, preventing double taxation. Impact of the amendment ensures that non-resident service providers are not taxed twice under multiple sections. and Removes uncertainty about whether income would fall under presumptive taxation (44BBD) or be assessed under 44DA/115A. also Provides simplified tax compliance for non-residents dealing with India’s electronics sector.

Section 44DA (Income from Royalties/FTS with PE in India)

• Applies to Non-residents earning royalties or fees for technical services (FTS) that are effectively connected to a Permanent Establishment (PE) in India.
• Taxation: Income is taxed at applicable slab rates, and deductions for expenses are allowed.

Section 115A (Income from Dividends, Interest, Royalties, and FTS without PE in India) :

• Applies to Non-residents earning income from dividends, interest, royalties, or FTS where no PE exists in India.
• Taxation: Taxed at concessional rates (10%-20%), but no deductions are allowed for expenses.

Clarification on Tax Treatment on Key Amendment in Finance Bill, 2025

The Finance Bill, 2025, now explicitly states that income assessed under Section 44BBD will not be subject to additional taxation under Section 44DA or Section 115A, ensuring no double taxation. Prevents overlapping taxation under 44DA and 115A, ensuring clarity and tax certainty for non-resident service providers.

Section	Applicability	Tax Treatment
44BBD (New)	Non-residents providing technology/services to India’s electronics manufacturing sector	Presumptive taxation (25% of gross receipts deemed taxable income)
44DA	Royalties/Fees for Technical Services (FTS) connected to a Permanent Establishment (PE) in India	Taxed as business income, deductions allowed
115A	Royalties, FTS, dividends, interest (without PE in India)	Concessional tax rates (10%-20%), no deductions allowed

The Finance Bill, 2025, has introduced Section 44BBD to establish a presumptive taxation regime for non-resident entities engaged in providing services or technology to India’s electronics manufacturing sector. This marks a pro-business tax reform aimed at making India an attractive destination for foreign technology providers in the electronics sector. With a simplified taxation framework and clarity on double taxation concerns, the regime is set to boost investment and ease compliance for non-residents.

Potential issues with the deemed taxation regime for non-residents

Potential issues with the deemed taxation regime for non-residents in the electronics manufacturing sector. Here are some key points to consider for each concern:

Non-resident subcontractors—

The provision seems to focus on direct service or technology providers to an Indian company. If a foreign company engages a subcontractor, the subcontractor’s revenue would come from the foreign company, not the Indian entity. This could mean they fall outside the deemed taxation regime. Clarification is needed on whether subcontractors can qualify or if their income remains taxable under regular international tax principles.

Composite contracts (Supply + Service)

The exclusion of supply revenue from the deemed taxation regime creates challenges for contracts involving both goods and services. Since many electronics manufacturing projects involve bundled contracts, this could lead to complexities in tax treatment. The government may need to provide specific guidance on how such contracts should be split for taxation purposes.

Compliance Risks for Resident Companies

The non-resident’s eligibility for the deemed taxation regime depends on the Indian company’s compliance with MEITY conditions. If the resident entity fails to meet these conditions, the foreign company may lose the deemed taxation benefit, causing tax uncertainty. Clearer guidelines or safeguards would help mitigate this risk.

Limitation to Resident Companies Only

• By restricting applicability to services or technology provided to a “resident company,” LLPs and other entities may be unintentionally excluded. This could either be a deliberate policy choice or an oversight requiring amendment.
• Key Concern: Will tax authorities insist on separating supply and service revenue, or will a composite contract be taxed under a single provision?

Potential Conflict with Royalty/FTS Provisions :

Typically, payments for services or technology are classified as Royalty or Fees for Technical Services  under the IT Act and DTAA. Tax Treatment Under Existing Law:

• • No PE in India: Taxed on a gross basis at 20% (plus surcharge and cess) or at DTAA rates (usually 10%-15%).
  • With PE in India: Taxed on a net basis under Section 44DA at the applicable foreign company tax rate (40% + surcharge & cess).

Ambiguity under Section 44BBD: Since 25% of gross receipts are deemed as profits, it results in an effective tax rate of 9.56%, potentially conflicting with 44DA (net basis) and 44D (gross basis) taxation. Will Section 44BBD override these provisions, or will tax authorities assess non-residents under provisions that lead to higher tax liability?

Other

• Section 44BBD does not offer this flexibility, potentially resulting in an overstatement of profits for service providers with low-margin operations.
• If the goal is to simplify taxation, 44BBD does not explicitly provide relief from Tax audits u/s 44AB and Maintaining books of accounts u/s 44AA. Audit or Compliance Relief exemptions should ideally be extended to Section 44BBD taxpayers.
• Whether taxpayers can opt out of Section 44BBD if they have a PE or if tax authorities will apply the more stringent provision.

Way Forward – Key Clarifications Needed from Tax Authorities

• Interaction with Sections 44DA & 44D—Will 44BBD override existing rules for royalty/FTS taxation?

• Flexibility to Declare Lower Profits—Can taxpayers opt for net taxation if they maintain books of accounts?

• Compliance Relief—Will 44BBD taxpayers be exempt from audit and bookkeeping requirements?

• PE Considerations—Will the provision apply equally to non-residents with and without a PE?

• Treatment of Composite Contracts—Will supplies be completely excluded, or will guidance be issued on contract structuring?