Government Plans Major Tax Overhaul to Boost Manufacturing, FDI and Digital Infrastructure: Report

The Central Government is preparing a comprehensive overhaul of India's tax framework through the proposed Taxation and Other Laws (Amendment) Bill, 2026, which aims to strengthen manufacturing, attract foreign investment, and support emerging sectors such as electronics production and digital infrastructure.

According to The Economic Times, the proposed legislation is expected to replace the Income Tax Ordinance issued in June and may be introduced in Parliament this week.

The proposed amendments seek to provide greater tax certainty, simplify investment rules, and improve India's competitiveness as a global manufacturing and investment destination.

Key Highlights

• The Centre is preparing the Taxation and Other Laws (Amendment) Bill, 2026.
• Tax incentives for electronics manufacturing may be extended until FY 2040-41.
• Foreign investors could benefit from simpler tax compliance rules.
• REITs, InvITs, data centres and sovereign debt investors may receive tax relief.
• The proposals aim to create a more predictable investment environment.

Manufacturing Tax Benefits May Continue Until FY2040-41

One of the most significant proposals is the extension of tax incentives for contract manufacturing of specified electronic products until FY 2040-41.

According to the report, eligible products may include:

• Mobile phones
• Laptops
• Tablets
• Servers
• Wearable devices
• Electronic components

The proposal is intended to encourage long-term investment while strengthening India's position as a global electronics manufacturing hub.

The government is also reportedly considering tax benefits for foreign companies storing electronic components in customs-bonded warehouses to improve supply chain efficiency.

Easier Tax Rules for Foreign Investors

The proposed Bill is also expected to simplify tax-related conditions applicable to Foreign Portfolio Investors (FPIs) and international investment funds.

According to the report, the reforms may ease requirements relating to:

• Minimum number of investors
• Minimum fund size
• Investment diversification
• Restrictions on investments in related entities

The objective is to make India's financial markets more attractive for global investors.

Relief for Sovereign Debt Investors

The legislation reportedly proposes tax exemptions on:

• Interest income
• Capital gains

earned by eligible foreign investors investing in Indian government securities.

The proposed relief would also extend to institutions such as the Bank for International Settlements (BIS), with the aim of encouraging greater foreign participation in India's sovereign debt market.

REITs and InvITs May Receive Tax Relief

The Bill is also expected to restore tax exemptions on dividend income distributed through:

• Real Estate Investment Trusts (REITs)
• Infrastructure Investment Trusts (InvITs)

The move could improve returns for investors and strengthen these investment platforms.

Data Centres Could Get Major Tax Support

India's rapidly expanding digital infrastructure sector is also expected to benefit.

According to the report, the proposed amendments include:

• Relaxed tax rules for leased data centres operated by Indian companies.
• Expanded eligibility for "specified data centres."
• Removal of certain approval requirements for foreign companies using Indian data centre services.

The proposals are aimed at encouraging further investment in India's digital economy.

Diamond Sector Also Included

The report states that the government is considering long-term tax exemptions until FY 2040-41 for foreign companies engaged in rough diamond trading through notified special zones.

The proposed incentives could benefit:

• Mining companies
• Brokers
• Auction houses
• Aggregators
• Sightholders

The move is intended to strengthen India's role in the global diamond trade.

Other Major Proposals

According to the report, the Bill may also include:

• A 25% surcharge for certain Special Purpose Vehicles (SPVs) opting for the new corporate tax regime.
• Simplification of rules governing digital payment incentives.
• Greater flexibility for the government to notify eligible electronic payment systems under the Payment and Settlement Systems Act.

These measures are intended to improve policy flexibility and reduce compliance complexity.

Why This Matters

If enacted, the proposed reforms could represent one of the most significant tax policy updates in recent years.

The measures are aimed at:

• Strengthening manufacturing.
• Attracting long-term foreign investment.
• Supporting digital infrastructure.
• Improving ease of doing business.
• Providing greater tax certainty for investors.

It is important to note that the proposals have been reported and will only take effect if approved by Parliament.

Frequently Asked Questions (FAQs)

1. What is the Taxation and Other Laws (Amendment) Bill, 2026?

It is a proposed Bill that seeks to introduce wide-ranging tax reforms aimed at supporting manufacturing, foreign investment, and strategic sectors.

2. Which industries could benefit?

According to reports, sectors including electronics manufacturing, data centres, REITs, InvITs, and the diamond industry could receive tax benefits.

3. Will foreign investors benefit?

Yes. The proposed reforms aim to simplify several tax-related compliance requirements for foreign portfolio investors and global funds.

4. Has the Bill been passed?

No. According to reports, the legislation is expected to be introduced in Parliament and will require approval before becoming law.

5. Why is the government introducing these reforms?

The objective is to improve India's investment climate, strengthen manufacturing, support strategic industries, and provide greater tax certainty.