NewsStocksBudget 2026 May Include Tax Clarifications for Data Centres and Remote Workers in IndiaBudget 2026 May Include Tax Clarifications for Data Centres and Remote Workers in India
CBDT plans to issue FAQs in Budget 2026 clarifying taxation rules for foreign companies without physical Indian offices, expanding permanent establishment definitions to include remote employees and data centres. Companies will face 35% corporate tax with no relief expected. Niti Aayog's optional presumptive taxation scheme remains under finance ministry consideration but may not feature in upcoming guidelines.
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The Central Board of Direct Taxes (CBDT) is preparing to issue comprehensive FAQs as part of the upcoming Union Budget 2026 to clarify which income-generating activities of foreign companies may be taxed in India, even without their physical office presence. Government officials have indicated that these new guidelines will likely expand the definition of 'permanent establishment' (PE) to include companies operating through remote employees or generating revenue via Indian-based data centres.
Current Taxation Framework and Challenges
Under existing Indian law, permanent establishment is defined in two main statutes: The Income Tax Act and various Double Taxation Avoidance Agreements (DTAAs) signed with other countries. A PE represents a business's taxable presence in a foreign country, obligating non-resident enterprises to pay local corporate income tax on profits generated in India at a rate of 35%.
Data centres are currently pushing back against paying the standard corporate tax rate, citing ambiguity in Income Tax law regarding PE tax liability. Companies argue that since remote employees are not on their payrolls, data centres and related activities cannot be classified as PE, making any revenue generated non-taxable.
Supreme Court Ruling Sets New Precedent
In July 2025, the Supreme Court delivered a landmark judgment in the Hyatt International case, ruling that foreign companies don't need to own or lease property for a "fixed place PE" to exist. If space is "at the disposal" of the foreign company—meaning they have power to conduct core business from there—it constitutes a PE. The Court determined that coordinated and continuous visits by multiple teams create business "permanence," even without single employees staying for 90 days.
Tax authorities are now applying this logic to the digital ecosystem. If a foreign AI firm maintains continuous access to servers in Indian data centres to run core algorithms, it is considered "at their disposal" and hence constitutes a PE.
Government's Position on Tax Relief
Government officials have made clear that the forthcoming CBDT FAQs are unlikely to provide taxable relief to foreign enterprises or "exempt any income from taxation purposes." This stance suggests a firm approach toward ensuring foreign companies pay appropriate taxes on Indian operations.
| Key Tax Parameters: | Details |
|---|---|
| Corporate Tax Rate: | 35% |
| Current PE Definition: | Physical presence required |
| Proposed PE Expansion: | Remote employees, data centres |
| Expected Relief: | None anticipated |
In October, Andhra Pradesh's IT Minister confirmed coordination with the central government to clear taxation hurdles for Google's ₹83,000 crore ($10 billion) data centre project in Visakhapatnam, emphasizing clarity on permanent establishment definitions to ensure tax certainty.
Niti Aayog's Alternative Taxation Proposal
Niti Aayog has recommended an optional presumptive taxation scheme (OPTS) for foreign enterprises across specific sectors including infrastructure, engineering services, telecom, e-commerce, and marketing. The proposal suggests taxing 10-30% of profits at the 35% corporate rate, with infrastructure sector companies facing taxation on 10% of India-generated profits.
The scheme offers flexibility, allowing companies to opt into the regime annually or choose regular financial statement filing if they believe actual profits are lower. Significantly, companies choosing presumptive taxation would avoid separate PE litigation for covered activities.
| Presumptive Tax Framework: | Proposal Details |
|---|---|
| Profit Taxation Range: | 10-30% of profits |
| Tax Rate Applied: | 35% corporate rate |
| Infrastructure Sector: | 10% profit taxation |
| Flexibility: | Annual opt-in/opt-out |
| PE Litigation: | Avoided for covered activities |
However, government officials indicate this recommendation remains "under consideration" by the finance ministry and may not feature in next month's CBDT FAQs. An internal Ministry of Electronics and Information Technology report examined presumptive taxation as a potential solution but excluded data centres from its scope.
Expert Perspectives on Regulatory Clarity
Tax experts emphasize the need for CBDT FAQs to bring uniformity in PE rule applications across varied cases. While judicial precedents have clarified PE elements, including dependent agents' roles and server significance, these rulings often relate to specific facts and treaties without providing uniform rules applicable across taxpayers.
Amit Maheshwari, Managing Partner at AKM Global, notes that clear guidance would help tax officers distinguish between core revenue-generating activities and routine support functions, reducing aggressive PE assertions and providing certainty to foreign investors.
Richa Sawhney, Tax Partner at Grant Thornton Bharat, describes PE as a dynamic taxation area evolving with each judicial verdict, with divergent verdicts adding confusion. She emphasizes that detailed CBDT guidelines would provide much-needed clarity and boost investor confidence.
The upcoming Budget 2026 clarifications represent a significant step toward resolving long-standing taxation ambiguities affecting foreign companies' operations in India's rapidly expanding digital economy.
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