The Taxation and Other Laws (Amendment) Bill, 2026 was passed by the Lok Sabha on 06 August 2026 and the Rajya Sabha on 10 August 2026. It received the President’s assent on 17 August 2026, and accordingly, the Taxation and Other Laws (Amendment) Act, 2026 (“2026 Tax Amendment”) has become applicable with effect from 01 April 2026, except where it sets out otherwise.

The 2026 Tax Amendment amends certain sector-specific tax benefits for, inter alia, electronics manufacturing and data centres, that were introduced vide the Finance Act, 2026, and introduces certain additional ones.

The law prior to this amendment:

Section 11 of the Income Tax Act, 2025 relates to “Incomes not included in total income”. When computing the total income of any person for a tax year under the Income Tax Act, 2025, certain specified incomes (set out in various schedules) are not to be included, subject to fulfilment of certain conditions. In effect, certain narrowly defined incomes accruing in India may be exempt from taxation in India if the specified conditions are fulfilled.

Schedule IV of the Income Tax Act, 2025 sets out Income not to be Included in Total Income of Eligible Non-Residents, Foreign Companies and Other Such Persons.

Sl. No. 13A of Schedule IV (inserted via Finance Act, 2026) states that where a foreign company provides capital goods, equipment or tooling to a contract manufacturer (which must be a company resident in India), for use in electronic manufacturing in India, then any income arising on account of providing such capital goods, equipment or tooling to the contract manufacturer, may not be taken into account when computing the total taxable income in India for a tax year for the foreign company (i.e., this income is not taxable in India).

This tax benefit, prior to the 2026 Tax Amendment, was subject to the following conditions:
(a) ownership of capital goods, equipment or tooling remains with the foreign company;
(b) capital goods, equipment or tooling are under the control and direction of the contract manufacturer;
(c) the contract manufacturer is located in a customs-bonded area;
(d) the contract manufacturer produces electronic goods on behalf of the foreign company for a consideration; and
(e) exemption available up to the tax year 2030-2031.

Changes in the 2026 Tax Amendment:

1. Extension in benefit period:
The benefit will be available up to tax year 2040-41 (amendment to Condition (e) in Sl. No. 13A of Schedule IV).

2. Change in condition:
The contract manufacturer must produce specified electronic goods on behalf of the foreign company for a consideration (amendment to Condition (d) in Sl.No. 13A of Schedule IV).

3. Specific list of electronic goods:
The 2026 Tax Amendment lists out the specific electronics to which these tax benefits will apply, namely (a) mobile phones; (b) laptops, all-in-one personal computers and tablets; (c) servers and ultra small form factor (USFF); (d) sub-assemblies to the finished goods mentioned in clauses (a) to (c); and (e) hearables, wearables and accessories related to the finished goods mentioned in clauses (a) to (c). (Insertion of new “Note 2A” in Schedule IV)

4. Insertion of tax benefit for storage of components in a custom-bonded warehouse, for use by a contract manufacturer of specified electronic goods – With effect from 01 October 2026:
The 2026 Tax Amendment exempts any income accruing or arising on account of storage of components in a warehouse in a customs-bonded area, by a foreign company, for sale to a contract manufacturer to be used for manufacturing of specified electronic goods. (Insertion of new Sl. No. 13G in Schedule IV).

The following conditions must be met to avail this benefit:
(a) Exemption is available on sale of components by the foreign company;
(b) The contract manufacturer produces electronic goods on behalf of any foreign company;
(c) The exemption shall be subject to furnishing of information in such form and manner, as may be prescribed; and
(d) exemption is available up to the tax year ending on 31 March 2041.

The benefits under this Sl. No. 13G will be available only to the following contract manufacturers: “an Indian company which produces specified electronic goods on behalf of any foreign company in a custom bonded area”.

POTENTIAL IMPLICATIONS FOR THE ELECTRONICS MANUFACTURING SERVICES (EMS) SECTOR

1. Potential incentive to choose India as the flagship contract manufacturing location (builds demand for India from Original Equipment Manufacturers (OEMs)):

• The 2026 Tax Amendment may benefit the decision-maker (i.e., global OEM). This may encourage global OEMs/ manufacturers to set up in India (or) deepen their India presence.

• This may complement and act as a corollary to the production-linked incentive schemes and the electronics components manufacturing scheme, which are subsidy-based policies that boosted domestic manufacturing capacity.

• Globally, competitive tax policies are perceived as more stable and attractive than short-term subsidies.

• As this is an amendment to domestic India tax laws, companies in countries with no/less favourable double-taxation avoidance agreements may also benefit.

2. Reduces Permanent Establishment (PE) risk, incentivizes India set-up/stockpile:

• By exempting income earned by a foreign company in a contract manufacturing arrangement (subject to conditions) from computation of its taxable India income, the risk of foreign company triggering a PE or business connection in India may reduce.

o NOTE: Existence of PE depends on the foreign company’s overall business operations with India. Whether a foreign company has an India PE will depend on an analysis of all its workstreams/verticals in India.

3. Lower cost of capital goods, components, and inventory:

• As long as OEMs and component suppliers pass on their respective tax benefits to EMS companies, leasing/obtaining capital goods and procuring components/inventory, respectively, may become more accessible and less expensive.

• This may increase the competitiveness of India’s EMS sector.

4. Supply chain resilience and domestic stocks – more nimble domestic manufacturing; hedge against geopolitical risks:

• Exemption from Income tax for sale of components stored in customs-bonded warehouses in India to EMS manufacturers for production of specified electronics, may encourage building of stockpiles in India.

• The tax benefit may be available as long as the contract manufacturer produces specified electronic goods on behalf of any foreign company. Therefore, benefit may be available to pure-play component supply entities and vendors also and may not be limited to the OEM.

• Hubs for stock of spares/parts can be physically very close to the manufacturing base. This can help reduce assembly line friction and shorten lead time, helping Indian manufacturers be nimbler in adopting new products. This can improve India’s competitiveness with traditionally agile electronics manufacturers such as China, Malaysia, and Vietnam.

• A larger India stockpile may also minimize the impact of geopolitical shifts, war and force majeure events.

• For the EMS manufacturer, the cascading beneficial impact may include shorter production cycles, greater working capital efficiency, higher volume driven by lower wait times, and greater certainty of component supply, in addition to agility.

NOTES:
o The benefit is available only if the foreign company sells components to the EMS manufacturer.
o The term “component” is undefined. Therefore, there may be no restriction at present, and it may be argued that the term includes sub-assemblies, spares, consumables, packaging and test fixtures of the specified electronic goods.

5. Longer duration of exemption, greater certainty, easier investment decisions:

• Tax exemptions will now be available up to 31 March 2041 (15 years). This may reduce early-stage investment risks and increase long-term predictability. This may also encourage greenfield investments and help companies develop robust cash-flow/stable revenue generation.

• It is interesting to note that Finance Act, 2026 had also inserted Sl. No. 13C in Schedule IV, exempting income earned by a foreign company by way of procuring data centre services. This tax break for the services sector will last 20 years, until 31 March 2047 (compared to the now-extended 15 years for the EMS manufacturing sector).

6. Selective product mix:

• By defining a list of specified electronic goods, the 2026 Tax Amendment appears to focus on capacity building in mobile phones, laptops/ personal computers/tablets, servers, USFF, sub-assemblies and accessories.

• This may help India build its attractiveness to diverse OEMs in areas of its manufacturing strength. This may also help build a supportive ecosystem for the sector as a whole.

• Inclusion of “servers” may be an attempt to localize manufacture of AI infrastructure.

7. Emphasis on manufacturing in India for export, customs-bonded contract manufacturers:

• Exemptions under Sl. No. 13A and Sl. No, 13G of Schedule IV require the EMS manufacturer to be in a customs-bonded area. This may ensure that the EMS manufacturer and foreign companies are subject to an efficient regulatory oversight. This may also encourage Indian manufacture for export.

8. Potential increase in M&A:

• The 2026 Tax Amendment may expand scope for deeper and broader EMS engagements in India, driving cross-border procurement contracts, new EMS entrants, and M&A-led consolidation in the EMS sector.