The Central Board of Direct Taxes (CBDT) may issue FAQs, as part of the upcoming Union Budget, to clarify which "income generating" activities of foreign companies may be taxed in India even without their physical office presence. New guidelines will likely expand the definition of a 'permanent establishment' (PE) to include companies that operate via remote employees or generate revenue through Indian-based data centers, Moneycontrol has learnt from two government officials.
Currently, data centres are pushing back on the payment of a standard corporate tax rate of 35% on the revenues they generate in India, citing ambiguity in the Income Tax law on tax liability of permanent establishments.
Under Indian law, PE is defined in two main statutes: The Income Tax Act and the various Double Taxation Avoidance Agreements (DTAAs) or tax treaties India has signed with other countries. A PE is an international tax law concept referring to a business's taxable presence in a foreign country. The existence of a PE obligates the non-resident enterprise (say based in US) to pay local corporate income tax on the profits generated (in India).
In India, for instance, the income earned by a foreign company’s permanent establishment is taxed at a corporate tax rate of 35 percent. However, companies contend that since the remote employees are not on their payrolls, data centres, and other activities cannot be classified as a PE, and hence any revenue generated is not taxable.
In July 2025, the Supreme Court, in a landmark judgement linked to the Hyatt International case, had ruled that for a "fixed place PE" to exist, the foreign company doesn't need to own or lease the property. If the space is "at the disposal" of the foreign company—meaning they have the power to conduct their core business from there—it is a PE. The Court ruled that even if no single employee stayed for 90 days, the coordinated and continuous visits by multiple teams created a "permanence" of business.
While the Hyatt case was about hotels, the tax authorities are applying its logic to the digital ecosystem. If a foreign AI firm has a continuous access to a server in an Indian data centre to run its core algorithms, it is "at their disposal" – and hence, is a PE.
Government officials say the FAQs or clarifications issued by the CBDT is unlikely to provide any taxable relief to foreign enterprises, and "exempt any income from taxation purpose".
In October, Andra Pradesh’s Minister of Information Technology had told Moneycontrol that the AP government has coordinated with the central government to ensure all the taxation hurdles are cleared for Google to build the $10-billion data centre in the Vishakhapatnam. "On the taxation front, we have brought clarity on how to define ‘permanent establishment’, to ensure tax certainty," Lokesh had said.
Niti Aayog's proposal for taxing foreign companies
In October, a Niti Aayog working paper had recommended an optional presumptive taxation scheme (OPTS) for foreign enterprises. The scheme listed specific sectors, such as, infrastructure, engineering services, telecom, e-commerce, marketing and distribution etc., and proposed to tax 10-30 percent of their profits at the 35 percent rate.
For instance, the paper proposes to tax 10 percent profit (generated in India) of a foreign company engaged in infrastructure sector – at the corporate tax rate of 35 percent.
As per the paper, foreign company could opt into the regime for a financial year and declare income at the prescribed rate, based on which they will be taxed. But if the company believes its actual profit is lower, it could opt out and file regular financial statements with supporting documentation.
It also says that if a foreign company opts for presumptive taxation for a particular activity, Indian tax authorities would not separately litigate the existence of a PE for that activity. This flexibility aligns with India’s tax treaties and the principle of taxing only real income, say tax experts.
The government officials quoted above said the Niti Aayog’s recommendation is “under consideration” by the finance ministry, but they may not feature in the FAQs that CBDT will publish next month.
“There has been discussion at the policy level about using presumptive taxation as a way to resolve these (tax) disputes. Under some existing provisions, foreign companies with certain types of permanent establishments can be taxed on a fixed percentage of their revenue. According to an internal report prepared by the Ministry of Electronics and Information Technology, presumptive taxation of permanent establishments was examined as one possible solution, but data centres were not included within its scope,” a second person aware of the matter told Moneycontrol.
“Data centres and digital servers are not clearly covered under those presumptive provisions. That is why most digital companies will not accept that using a data centre in India automatically creates a permanent establishment,” the person added.
Experts’ take
Tax experts say that CBDT FAQs are needed to bring uniformity in how PE rules are applied to varied cases. Although some judicial precedents have clarified elements of PE, such as the role of dependent agents, the significance of servers or fixed places of business, and the extent of Indian activities, these rulings often relate to specific facts and treaties, and do not always provide a uniform rule that can be applied across taxpayers, they say.
“As a result, MNCs are likely to face uncertainty regarding how tax officers might interpret PE in respective assessment(s). Notably, clear guidance would certainly help tax officers distinguish between core revenue-generating activities and routine support functions, reduce aggressive PE assertions, significantly lower litigation, and provide certainty to foreign investors,” said Amit Maheshwari, Managing Partner, AKM Global.
Richa Sawhney, Tax Partner, Grant Thornton Bharat says that PE is a dynamic area of taxation law in India, evolving with each judicial verdict. At times divergent verdicts on existence or non-existence of PE have added to the confusion. “Therefore, detailed guidelines from CBDT on this critical matter, would surely help provide much needed clarity and boost investor confidence.”
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