Taxation and Other Laws (Amendment) Bill, 2026: Electronics Manufacturing, Digital Payments and Fund Management Reforms

Why in News

The Taxation and Other Laws (Amendment) Bill, 2026 was passed by the Lok Sabha on 6 August 2026 by voice vote, amid opposition protests. Introduced on 4 August 2026 by Finance Minister Nirmala Sitharaman, the Bill replaces the Income-tax (Amendment) Ordinance, 2026 — which had been promulgated earlier to provide immediate tax relief — with a permanent legislative framework. The Bill amends three Acts: the Payment and Settlement Systems Act, 2007, the Income-tax Act, 2025, and the Finance Act, 2026.

Background

India's tax policy environment in 2026 is shaped by three imperatives: (1) countering external economic shocks — including US tariff turbulence and global supply-chain disruptions — through domestic manufacturing incentives; (2) attracting foreign capital in electronics, fund management, and financial services; and (3) simplifying the regulatory framework for digital payments.

The government had promulgated the Income-tax (Amendment) Ordinance, 2026 earlier this year to provide immediate certainty to foreign investors in electronics manufacturing and fund management. An ordinance must be replaced by legislation within six weeks of the next parliamentary session; this Bill is that replacement, now with additional provisions and parliamentary approval.

The Bill reflects the government's stated objective of "tax certainty, ease of doing business, and support to manufacturing" — also described as mitigating "external economic shocks" while maintaining "domestic economic stability."

Current Developments

The Bill was introduced in the Lok Sabha on 4 August 2026 and passed on 6 August 2026. Opposition members staged protests and demanded discussion, but the Bill was passed by voice vote. The Rajya Sabha is expected to take up the Bill shortly thereafter.

Key Facts

• India's electronics exports reached approximately $35 billion in 2025–26, with the government targeting $100 billion by 2030 under the National Electronics Policy.
• The Production Linked Incentive (PLI) Scheme for electronics (launched 2020) has attracted over ₹1.5 lakh crore in committed investments.
• India's data centre capacity has grown to 1,000+ MW and is projected to reach 5,000 MW by 2030, attracting over $10 billion in investment.
• The Unified Payments Interface (UPI) processed 23.66 billion transactions worth ₹29.88 lakh crore in July 2026 alone.
• The Bill replaces the Income-tax (Amendment) Ordinance, 2026 — ordinances under Article 123 of the Constitution must be replaced by Parliament within six weeks of the commencement of the next session.

Constitutional Provisions

• Article 265: No tax shall be levied or collected except by authority of law — all tax exemptions and changes in the Bill require parliamentary authorisation, which this Bill provides.
• Article 123: Power of the President to promulgate Ordinances when Parliament is not in session; the Bill replaces such an Ordinance, fulfilling the constitutional obligation.
• Entry 82, List I (Union List): "Taxes on income other than agricultural income" — Parliament's exclusive competence for income tax legislation.
• Article 110: Definition of Money Bill — taxation Bills must originate in the Lok Sabha as Money Bills.

Legal Framework — Key Provisions

1. Payment and Settlement Systems Act, 2007 — Amendments

• Delinks fee-free digital payments from income tax: Previously, the exemption on merchant discount rates (MDR) for UPI/RuPay transactions was embedded in the Income-tax Act. The Bill moves this to a standalone framework under the PSS Act, giving the Central Government flexible authority to notify eligible fee-free electronic payment modes independently — future-proofing the framework as payment technologies evolve.

2. Income-tax Act, 2025 — Amendments

3. Finance Act, 2026 — Amendments

• Increases surcharge for special purpose vehicles (SPVs) adopting the new tax regime from 10% to 25%.
• Provides dividend relief to business trust unit holders in specified scenarios, reducing double taxation on REIT/InvIT distributions.

Institutional Framework

• Ministry of Finance (Department of Revenue / CBDT): Administers income tax; nodal ministry for the Bill.
• Central Board of Direct Taxes (CBDT): Issues notifications and guidelines implementing tax exemptions and conditions.
• Reserve Bank of India (RBI): Regulates Payment and Settlement Systems; the delinked digital payments framework transfers notification power to Central Government (in consultation with RBI).
• NPCI (National Payments Corporation of India): Operates UPI and RuPay; benefits from the delinked, more flexible fee-free payments framework.
• IFSCA (International Financial Services Centres Authority): Regulates GIFT City; fund management and BIS exemptions support GIFT City's growth as a global financial hub.
• Ministry of Electronics and Information Technology (MeitY): Electronics manufacturing exemptions align with the PLI scheme administered by MeitY.

Economic Dimensions

The Bill is explicitly calibrated to India's "China+1" opportunity — as global manufacturers diversify away from Chinese supply chains, India is positioning itself through PLI schemes and now tax certainty for contract manufacturers and component suppliers. Extending electronics exemptions to 2041 provides a 15-year investment horizon, essential for large semiconductor and electronics manufacturing facilities with decade-long payback periods.

The diamond trading zone exemptions target India's aspiration to become a global diamond trading hub, potentially attracting the world's largest diamond traders (historically based in Antwerp, Dubai, and New York) through tax-neutral zone operations.

Banking & Financial Angle: The fund management rationalisation and Government Securities exemptions for FIIs/BIS directly impact India's capital account. BIS exemptions on G-sec interest/capital gains could incentivise BIS to increase its Indian rupee-denominated sovereign debt holdings — supporting rupee internationalisation. REIT/InvIT dividend relief improves the attractiveness of these instruments for retail and institutional investors, deepening India's infrastructure financing market.

Environmental Dimensions

Electronics manufacturing — if supported through sufficient environmental standards — can align with India's green manufacturing goals. The extended tax incentives for contract manufacturers cover products like energy-efficient servers and wearables used in health monitoring. However, the Bill does not include specific environmental conditionalities on the electronics manufacturing exemptions, which may need to be addressed through MeitY's PLI scheme conditions separately.

Data centre investment attracted through the simplified data centre framework has significant energy implications: data centres are large electricity consumers. India's Data Centre Policy should accompany tax incentives with renewable energy conditionalities.

Social Dimensions

Electronics manufacturing employment is a major social dividend: PLI-linked factories employ hundreds of thousands of workers, disproportionately in Tier-2 and Tier-3 cities and among first-generation industrial workers. Extended tax certainty through 2041 underpins continued PLI-scheme investment, sustaining this employment pipeline. The UPI fee-free framework protections benefit small merchants (kirana stores, street vendors) who depend on zero-cost digital payment acceptance.

International Relations

The Bill's electronics manufacturing provisions are partly a response to the US tariff environment in 2025–26, which disrupted global supply chains and accelerated the China+1 manufacturing shift. By extending exemptions to 2041, India signals long-term policy commitment to foreign investors — critical in a competitive landscape where Vietnam, Indonesia, and Mexico also court electronics manufacturers.

The BIS exemption signals India's aspiration to deepen integration with the global financial architecture. The Bank for International Settlements — the "bank of central banks" — holds significant cross-border positions; India's exemption facilitates BIS operations in Indian financial markets, supporting the rupee's gradual internationalisation.

Challenges

• Ordinance route concerns: The Bill replaces an Ordinance, raising parliamentary governance concerns about bypassing pre-budget scrutiny and committee examination. Critics note that major tax changes promulgated by Ordinance erode legislative deliberation.
• Revenue implications: Extended tax exemptions to 2041 reduce the tax base; the government has not published a revenue impact assessment, making it difficult to evaluate fiscal prudence.
• Fund management conditions: The 5% Indian participation cap for offshore funds remains complex; its rationalisation may still not be sufficient to fully compete with Singapore and Mauritius as fund domicile jurisdictions.
• Digital payment governance: Delinking fee-free digital payments from statute to executive notification increases regulatory flexibility but reduces parliamentary oversight over payment economics.

Government Initiatives

• PLI Scheme for Large-Scale Electronics Manufacturing: ₹40,995 crore scheme targeting ₹10 lakh crore in electronics output; exemptions in this Bill directly support PLI beneficiaries.
• Semicon India Programme (2021): $10 billion incentive package for semiconductor fabs, ATMP (Assembly, Testing, Marking and Packaging), and display fabs.
• GIFT City (IFSCA): International Financial Services Centre at Gandhinagar, Gujarat; fund management and BIS exemptions aim to deepen GIFT City's appeal.
• National Electronics Policy (2019): Targets $400 billion electronics production and $100 billion exports by 2025 (now extended targets).
• Digital India Initiative: UPI and RuPay zero-MDR policy, now delinked from income tax for greater flexibility.

Way Forward

The Economic Survey 2025–26 highlighted tax certainty as the single most important non-tariff factor for foreign direct investment decisions. The Finance Commission (16th) has emphasised revenue neutrality in tax policy changes. Looking ahead:

• CBDT should publish a comprehensive revenue impact statement for all extended exemptions to ensure fiscal transparency.
• Parliament should establish a standing committee mechanism to review Ordinances promulgated on fiscal matters, reducing the need for post-facto replacement Bills.
• The government should pair electronics manufacturing tax incentives with environmental standards (e-waste management, green energy usage) to align with India's net-zero commitments.
• The IFSCA should issue clear operational guidelines for the BIS exemption and the rationalised fund management conditions to ensure rapid uptake by international players.

Previous UPSC Questions

UPSC Prelims 2022: Questions on UPI, digital payments, and NPCI have featured regularly. UPSC Mains GS-III 2020: "Explain the significance of the PLI scheme in boosting domestic manufacturing and its economic implications." The 2026 Taxation Amendment Bill's electronics manufacturing provisions directly extend the policy framework underlying such questions.

Possible Mains Questions

1. The Taxation and Other Laws (Amendment) Bill, 2026 uses tax policy as an instrument of industrial and investment strategy. Critically examine the Bill's key provisions and assess whether India's approach to tax certainty can successfully attract global electronics manufacturers. (250 words, GS-III)
2. "The delinking of fee-free digital payment exemptions from income tax legislation is a governance reform, not merely a technical amendment." Analyse this statement in the context of parliamentary oversight and the digital payments ecosystem. (150 words, GS-III)

Possible Prelims MCQs

1. Q: The Taxation and Other Laws (Amendment) Bill, 2026 replaces which Ordinance?
   (a) Finance Ordinance, 2026   (b) Income-tax (Amendment) Ordinance, 2026   (c) Taxation Laws (Relaxation) Ordinance, 2026   (d) Payment Systems Ordinance, 2026
   Answer: (b)
   Explanation: The Bill explicitly replaces the Income-tax (Amendment) Ordinance, 2026, fulfilling the constitutional obligation under Article 123 to replace an Ordinance with legislation within six weeks of the next Parliamentary session.
2. Q: Under the Taxation and Other Laws (Amendment) Bill, 2026, the tax exemption for foreign companies supplying capital goods to Indian electronics contract manufacturers has been extended to which year?
   (a) 2030–31   (b) 2035–36   (c) 2038–39   (d) March 31, 2041
   Answer: (d)
   Explanation: The Bill extends the sunset on tax exemptions for foreign companies supplying capital goods/tooling to Indian electronics contract manufacturers from the earlier 2030–31 to March 31, 2041 — providing a 15-year investment horizon to attract long-cycle manufacturing investment.
3. Q: Which of the following does NOT feature among the reforms in the Taxation and Other Laws (Amendment) Bill, 2026?
   (a) Exemption for foreign diamond companies in notified special zones   (b) Delinked digital payment fee-free framework from income tax   (c) BIS exempted from interest income and capital gains on government securities   (d) Mandatory GST registration for all MSME units with turnover above ₹10 lakh
   Answer: (d)
   Explanation: GST registration thresholds are governed by the GST Council/CGST Act, not this Bill. The other three — diamond zone exemption, digital payments delink, and BIS exemption on government securities — are all actual provisions of the Taxation and Other Laws (Amendment) Bill, 2026.

Essay Dimensions

1. "Tax certainty as the new FDI magnet: how India's long-horizon exemptions are designed to win the China+1 electronics race."
2. "Ordinance as an economic governance tool: democratic deficit or necessary agility in a volatile global economy?"
3. "GIFT City and the rupee's global ambitions: fund management, BIS exemptions, and the long road to currency internationalisation."
4. "Digital payments and the regulatory state: who governs the economics of zero-cost UPI in a delinked framework?"
5. "Revenue foregone vs. investment secured: the fiscal calculus behind India's decade-long electronics manufacturing tax exemptions."

Interview Questions

1. The Bill extends electronics manufacturing tax exemptions by 10 years to 2041. Critics say this is a subsidy that distorts the market; proponents say it is an industrial policy necessity. What is your view, and what conditionalities should accompany such exemptions?
2. The government used the Ordinance route to promulgate these tax changes before Parliamentary approval. Does this reflect urgency or governance weakness? What reforms would you recommend to the Ordinance-making power under Article 123?
3. Delinking UPI's zero-MDR framework from income tax and moving it to executive notification increases regulatory flexibility but reduces parliamentary scrutiny. As a regulator, how do you balance agility with democratic accountability in digital payment governance?
4. The diamond trading zone exemption is aimed at attracting the global diamond ecosystem. India already has the Surat Diamond Bourse. What additional ecosystem factors — beyond tax exemptions — are needed to make India a genuine diamond trading hub?
5. The Bill targets GIFT City for fund management rationalisation. What is the current status of GIFT City as a global financial hub, and what structural gaps remain despite the tax incentives offered?

FAQ

What is an Income-tax Ordinance, and why does it need to be replaced?

Under Article 123 of the Constitution, the President can promulgate an Ordinance when Parliament is not in session, if immediate action is needed. An Ordinance has the same force as an Act but must be replaced by parliamentary legislation within six weeks of the next session, or it lapses. The Taxation and Other Laws (Amendment) Bill, 2026 is the parliamentary replacement for the Income-tax (Amendment) Ordinance, 2026.

How does the digital payments delink work?

Earlier, the zero-MDR (Merchant Discount Rate) policy on UPI/RuPay was embedded in the Income-tax Act — a cumbersome location for what is essentially a payments policy. The Bill moves this to the Payment and Settlement Systems Act, 2007, allowing the Central Government to notify eligible fee-free payment modes independently without amending income tax law.

What is the BIS and why is its exemption significant?

The Bank for International Settlements (BIS), headquartered in Basel, Switzerland, is the international body that fosters central bank cooperation — often called the "bank of central banks." Exempting BIS from interest income and capital gains tax on Indian government securities makes it economically neutral for BIS to hold Indian sovereign debt, potentially increasing foreign institutional demand for G-secs and supporting rupee internationalisation.

Further Reading

• PRS India — Taxation and Other Laws (Amendment) Bill, 2026
• Income Tax Department of India
• IFSCA — International Financial Services Centres Authority (GIFT City)

Image prompt (for editor): Infographic showing 5 pillars of the Bill — Electronics Manufacturing (microchip icon), Data Centres (server rack), Diamond Trading (gem icon), Fund Management (GIFT City skyline), Digital Payments (UPI logo-style). Clean blue-saffron-white palette. No copyrighted brand logos.