NITI Aayog releases Tax Policy Working Paper on Permanent Establishment and Profit Attribution for Foreign Investors in India | Current Affairs | Vision IAS
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NITI Aayog releases Tax Policy Working Paper on Permanent Establishment and Profit Attribution for Foreign Investors in India

Posted 04 Oct 2025

2 min read

Article Summary

Article Summary

The NITI Aayog's working paper addresses complexities in India's PE rules affecting FDI inflows, recommending clarity, dispute resolution, and stakeholder engagement to encourage investment and ensure fair profit attribution.

The paper highlights that complexities surrounding Permanent Establishment (PE) rules in India impact the inflow of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).

About Permanent Establishment (PE)

  • Permanent Establishment is a fixed place of business where the enterprise conducts its activities wholly or partly.
    • Permanent Establishment determine a country’s right to tax the business income of non-resident entities, thereby profoundly influencing the investment climate and flow of capital. 
    • Source state has the authority to tax the profits attributable to the PE within its borders. 
  • In India, Income Tax Act, 1961, employs the term “Business Connection” for determination of PE and specific PE definitions are primarily found in Double Taxation Avoidance Agreements (DTAAs). 
    • India expanded definition of PE with introduction of Significant Economic Presence (SEP) criteria to tax digital businesses which does not have physical presence in India. 
  • Issues with PE rules: Ambiguity surrounding definition creates significant tax risks, compliance burden, differing views for profit attribution between tax authorities and companies, mixed application of Arm’s Length Principle etc. 

Key Recommendations of Working Paper

  • Introduce Optional Presumptive Taxation Scheme: Pre-emptively defining a fair profit rate for taxation, thereby providing certainty to taxpayers and tax authorities. 
  • Legislative Clarity: Codify clear PE and profit attribution principles, aligning with OECD and UN models and maintain policy against retrospective taxation. 
  • Robust Dispute Resolution Mechanisms: Expand Advance Pricing Agreement (APA) and Mutual Agreement Procedure (MAP) for quicker settlements.
  • Stakeholder Engagement: Mandatory public consultation on major tax policy changes and enforcing Taxpayer Charter.
  • Tags :
  • Foreign Direct Investment (FDI)
  • Permanent Establishment (PE)
  • Foreign Portfolio Investment (FPI)
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