(MENAFN- Live Mint) New Delhi: Federal policy think tank NITI Aayog on Friday proposed a presumptive taxation scheme for offshore companies deriving profits from India as part of efforts to enhance the country's appeal to investors with tax certainty and ease of doing business.

NITI Aayog said such an optional, industry-specific scheme, along with broader legislative clarity, administrative efficiency, strong dispute resolution schemes and adoption of global best practices, will dramatically cut litigation. That will improve investor confidence and secure India's tax base by attracting higher-quality, sustainable foreign direct investment, it said.

Non-resident companies' business profits are taxable if they have a permanent establishment (PE) or a fixed place of business in India as per the applicable tax treaty with the entity's home country. However, disputes often arise over its interpretation.

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As the digital economy expanded, non-resident companies, even without a fixed place of business, were able to offer services to Indian customers. This prompted the government to introduce the concept of 'significant economic presence' for taxation in the Income Tax Act . However, the rules to attribute profits to such companies have yet to be notified.

NITI Aayog proposed a simplified, optional tax scheme where a foreign company can choose to be taxed on a pre-defined, industry-specific percentage of its gross revenue from India, rather than undergoing a complex, case-by-case audit. This would reduce officials' discretion while simplifying compliance, NITI Aayog said.

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The idea is to ensure that a predictable regime with ease of doing business.

The think tank said foreign direct investment (FDI) growth inflow in the last two decades indicates India's fundamental economic strengths, but the persistent tax uncertainty acts as a drag on the full potential of FDI.

“By addressing these tax issues, India can not only sustain its positive FDI growth trajectory but significantly enhance it, attracting higher quality and more sustainable FDI rooted in genuine economic activity rather than tax arbitrage,” NITI Aayog stated.

This would ultimately secure and potentially expand India's tax base in the long term, fostering mutual benefit for both the nation and its foreign investors, NITI Aayog said, proposing a comprehensive framework to enhance tax certainty for foreign investors.

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Income tax litigation in India, particularly emanating from disputes surrounding the constitution and attribution of permanent establishment, underscores the increasingly intricate interplay between evolving jurisprudence, aggressive revenue posturing and the nuanced structures of transnational commerce, said Sandeep Jhunjhunwala, M&A tax partner at NangiaNXT, a consulting firm.

With such a surge in tax litigation in the backdrop of a robust upswing in FDI, the working paper from NITI Aayog showcases a forward-looking and pragmatic approach to policy-making, said Jhunjhunwala.

“The proposed optional presumptive taxation scheme of levying income tax in the range of 5-30% of India-sourced gross revenue, spread across industry verticals, with the option to opt out if a foreign company believes that its actual profits attributable to India are lower than the presumptive figure, is a welcome proposition,” said Jhunjhunwala.

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