Planning, Anti-avoidance and Cross-border Positions
Planning in Indian direct tax now happens inside a much tighter frame than it did a decade ago: a general anti-avoidance rule with a modest threshold, a treaty network carrying a principal purpose test, and a set of levies that were introduced and then abolished. What has not arrived is the global minimum tax, and a lot of published material implies otherwise.
- Rates and the concessional regimes
- The anti-avoidance rule and what is grandfathered
- Treaty positions, including the Mauritius protocol now in force
- The abolished equalisation levy, and where India stands on global minimum tax
The starting point for any planning conversation
| Taxpayer | Position |
|---|---|
| Domestic company, standard | 30 per cent, reduced to 25 per cent where turnover in the second preceding year did not exceed ₹400 crore. Surcharge 7 per cent between ₹1 crore and ₹10 crore of income and 12 per cent above, plus 4 per cent cess. |
| Domestic company, concessional regime | 22 per cent plus 10 per cent surcharge plus cess, an effective 25.17 per cent. Irrevocable, and outside minimum alternate tax. Section 115BAA becomes section 200. |
| New manufacturing company | 15 per cent plus surcharge and cess, an effective 17.16 per cent. Closed to new entrants: manufacturing had to begin by 31 March 2024. Section 115BAB becomes section 201. |
| Foreign company | 35 per cent, reduced from 40 per cent by the Finance (No. 2) Act 2024, with surcharge of 2 or 5 per cent. |
| Individual, default regime | Nil to ₹4 lakh, then 5, 10, 15, 20, 25 and 30 per cent to above ₹24 lakh, with a ₹75,000 standard deduction on salary, a rebate of up to ₹60,000 where income does not exceed ₹12 lakh, and surcharge capped at 25 per cent. |
| Minimum alternate tax, section 206(1) | Reduced from 15 to 14 per cent of book profit with effect from 1 April 2026. The 9 per cent rate continues, unchanged rather than newly introduced, for a qualifying international financial services centre unit deriving its income solely in convertible foreign exchange. Tax arising from that date is a final tax and generates no new credit. Credit accumulated to 31 March 2026 is preserved but is usable only where the company moves to the applicable concessional corporate regime, and then only up to 25 per cent of that year liability. That condition is the part most often left out: the accumulated credit is being used as an incentive to move regime, not as a set-off available where you are |
| Alternate minimum tax, non-corporates, section 206(2) | 18.5 per cent of adjusted total income where the regular income tax is lower, 15 per cent for a co-operative society and 9 per cent for a qualifying international financial services centre unit deriving its income solely in convertible foreign exchange, with credit carried forward for up to fifteen tax years. It applies to a non-company person only where that person has claimed a deduction under a section in Chapter VIII-C other than section 149, or under section 46. A limited liability partnership claiming no such incentive deduction is not brought in merely by having a low margin. Where one is claimed, though, there is no ₹20 lakh escape: that exclusion is confined to individuals, Hindu undivided families, associations, bodies of individuals and artificial juridical persons |
Section 207 is not the alternate minimum tax provision. It taxes specified dividend, interest, royalty and technical services income of non-residents and foreign companies, succeeding section 115A of the 1961 Act. Commentary placing alternate minimum tax at section 207 is wrong. Confirmed by our subject matter expert on 17 September 2026.
The rule, and what it does not reach
The general anti-avoidance rule sits at sections 95 to 102 of the 1961 Act and at sections 178 to 184 of the 2025 Act, materially unchanged. The main purpose test is necessary but is not on its own sufficient: an arrangement is impermissible where its main purpose is to obtain a tax benefit and it also satisfies at least one of the statutory tainted-element tests, such as creating non-arm-length rights or obligations, misusing or abusing the Act, lacking commercial substance, or being carried out in a manner not ordinarily employed for bona fide purposes.
The ₹3 crore figure is an exclusion rather than a threshold the rule reaches up to. Under rule 128 of the Income-tax Rules 2026 the rule does not apply where the aggregate tax benefit in the relevant tax year to all parties to the arrangement does not exceed ₹3 crore. Exactly ₹3 crore is inside the exclusion, and the benefit is aggregated across the parties rather than tested separately for each taxpayer. The reference and Approving Panel procedure sits separately, at section 274, not within sections 178 to 184.
Grandfathering is narrower than it is usually described. Rule 128(1)(d), read with the amended rule 128(2), excludes income arising from the transfer of an investment made by that person before 1 April 2017. It does not place an entire legacy structure permanently outside the rule, and rule 128(2) otherwise allows the rule to apply to an arrangement whenever entered into where the tax benefit is obtained on or after 1 April 2017. The 2026 reaffirmation is Notification No. 55/2026 of 31 March 2026 amending rule 128, with the parallel amendment to rule 10U of the 1962 Rules made by Notification No. 54/2026 of the same date.
The practical point for planning is that the rule does not catch commercial substance. It catches arrangements whose main purpose is the benefit. The distinction is fact-heavy and it is made on contemporaneous evidence, which means the time to document the commercial rationale for a structure is when the structure is created.
The Mauritius position, stated precisely
Circular No. 01/2025 of 21 January 2025 confirms that the principal purpose test applies prospectively from the date on which the instrument introducing it became effective: where it came in bilaterally, from the date the treaty or amending protocol entered into force; where it came in through the multilateral instrument, from the date those provisions entered into effect for that particular treaty under article 35. It also confirms that the treaty-specific grandfathering provisions in the India and Mauritius, India and Singapore and India and Cyprus treaties sit outside the test and continue to be governed by the treaties themselves. That second limb is what preserves the position of pre-April 2017 acquisitions by residents of those three states. Being outside the principal purpose test does not dispense with any separate limitation of benefits or other eligibility condition in the treaty.
The Mauritius protocol entered into force on 10 August 2026
The protocol introducing the principal purpose test into the India and Mauritius treaty was signed on 7 March 2024. The Mauritian Cabinet approved ratification on 17 July 2026, Mauritius completed ratification on 29 July, the protocol was gazetted there on 8 August and it entered into force on 10 August 2026. The principal purpose test therefore applies prospectively from that date, subject to the treaty-specific grandfathering confirmed by Circular No. 01/2025. This is where a large proportion of published Indian material is currently wrong, in both directions: a good deal of it still describes the protocol as signed and awaiting ratification, which was true until late July 2026 and is not true now, and some ignores it entirely.
The India and Singapore treaty is covered by the multilateral instrument and the principal purpose test applies to it. Capital gains have been source-taxable there since the 2016 protocol, with pre-April 2017 shares grandfathered.
Place of effective management remains the residence test for a foreign company, with the Board's 2017 guiding principles and the turnover carve-out from the active business outside India test. Thin capitalisation, formerly section 94B and now section 177, restricts interest paid to a non-resident associated enterprise, or on third-party debt guaranteed by one, above ₹1 crore to 30 per cent of earnings before interest, tax, depreciation and amortisation, with an eight-year carry forward of the disallowed interest. Banks and insurers are excluded.
Two abolished levies and one that has not arrived
The equalisation levy is gone, both parts
The 2 per cent levy on electronic commerce supplies was withdrawn for supplies made or facilitated on or after 1 August 2024, and the 6 per cent levy on specified services, principally online advertising, from 1 April 2025. The part that matters and is routinely left out of the celebration: the corresponding income-tax exemption for the non-resident service provider under section 10(50) ends from assessment year 2026-27. Income previously protected by that exemption must now be tested under the income-deeming provisions and the relevant treaty. The abolition removes the levy; it does not establish that the underlying income is exempt from ordinary income tax.
Significant economic presence is retained
In section 9 of the 2025 Act: aggregate payments for transactions in goods, services or property with persons in India exceeding ₹2 crore in the tax year, or systematic and continuous solicitation of business or interaction with 300,000 or more users in India. It does not override a treaty. It bites where there is no treaty, or where the treaty's permanent establishment article is not engaged.
India has not implemented the global minimum tax
As at September 2026, India had enacted no income inclusion rule, no undertaxed profits rule and no qualified domestic minimum top-up tax, and imposed no Indian registration, notification, return or payment obligations under the Pillar Two global minimum tax framework. Nothing was introduced by the Finance Act 2026 or by any later notification. That word Indian is doing work: an Indian constituent entity may still have to provide information or assist with filings imposed on its group by another jurisdiction that has implemented, and the absence of Indian legislation does not remove those group-level obligations. The correct framing for an Indian group is the opposite of the one usually published: the exposure is not an Indian filing obligation, it is a foreign top-up tax in jurisdictions that have implemented, plus data requests from a foreign parent.
Thresholds, safe harbour and the block option
| Obligation | Threshold |
|---|---|
| Accountant's report | Every international transaction with an associated enterprise, irrespective of value. Specified domestic transactions above ₹20 crore. |
| Contemporaneous documentation | Aggregate international transactions exceeding ₹1 crore |
| Master file | Consolidated group revenue exceeding ₹500 crore, with a second limb on the value of Indian international transactions |
| Country by country report | Consolidated group revenue for the accounting year immediately preceding the reporting accounting year exceeding ₹6,400 crore. For a group with a 31 March year end reporting for the year ended 31 March 2026, the test is applied to revenue for the year ended 31 March 2025. The ₹5,500 crore figure that still circulates is the original 2017 threshold and was superseded in 2021. The ₹6,400 crore figure applies under rule 10DB of the 1962 Rules and continues under rule 124 of the Income-tax Rules 2026, with Form 59 succeeding Form 3CEAD. Do not confuse it with the much lower master file thresholds above |
Safe harbour was widened by Notification No. 21/2025 of 25 March 2025, which raised the eligibility ceiling from ₹200 crore to ₹300 crore for specified software development, information technology enabled, knowledge process outsourcing and contract research and development services, and expanded core auto components to include lithium-ion batteries for electric or hybrid electric vehicles. The word specified matters: the notification distinguishes software-related and generic pharmaceutical research and development rather than covering every kind of contract research. Those amendments applied to assessment years 2025-26 and 2026-27 only.
What follows them is not another annual extension of the old rules. From tax year 2026-27 the Income-tax Rules 2026 provide a five-year safe harbour election for qualifying information technology services, under section 167 of the 2025 Act with the pricing conditions in rule 89 and the election in rule 91, made on Form 49. Software development, information technology enabled services, knowledge process outsourcing and software-related contract research are consolidated into a single category at a uniform margin of 15.5 per cent of operating expenses, with a ₹2,000 crore aggregate operating revenue ceiling tested in the first year of the block. The election runs for five consecutive tax years subject to the eligibility, annual compliance and withdrawal provisions. Tax year 2027-28 is therefore covered. The old ₹300 crore ceiling and the category-specific margins were not carried forward for these services, though ₹300 crore may remain relevant to other categories such as pharmaceutical contract research, so it should not be quoted as the general captive services ceiling.
A block assessment option introduced by the Finance Act 2025 allows an arm's length price determined for one year to be applied to the same transaction for the two following years, on the taxpayer's option, with the transfer pricing officer ruling on validity within a month. For a captive entity with stable transactions that is a material reduction in recurring cost and risk.
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Direct Taxation
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If your structure depends on a treaty position, the useful conversation is about what is grandfathered and what is not. That distinction is doing most of the work and it is not always where people assume it is.
Position as at 16 September 2026. Reviewed every six months.
This page is general information, not professional advice. India is operating two income tax statutes at once. The Income-tax Act 1961 governs FY 2025-26 and everything before it, including assessments, appeals and updated returns for those years, which will run into the 2030s. The Income-tax Act 2025 came into force on 1 April 2026 and governs tax year 2026-27 onward, with every section renumbered and every form renumbered with them. A statement about Indian income tax that carries neither a year label nor an Act label is not a statement anyone can act on. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.