How India's tax reforms are shaping the investment landscape

India's economy is rapidly growing and modernising, creating new opportunities for businesses and global investors. Smart tax reforms, such as the Goods and Services Tax (GST) and lower corporate taxes, are restructuring how businesses currently operate. These changes have unified the market, reduced costs and simplified compliance with regulations.

The goal is clear: to build a stable, fair and competitive tax system that attracts long-term investment. And it is working. India's new tax setup is transforming the country into a major destination for global investors.

Evolution of India's tax reforms

The Income Tax Act, 1922, introduced a specific nomenclature for various income tax authorities for the first time, laying the foundation for a proper system of administration. The current Income Tax Act was enacted in 1961 and has been amended nearly 65 times.

The taxation system, as we know it today, has undergone a significant upgrade in recent years. The focus has been on making it simpler, more digital and more transparent. Let's look at some of the key taxation reforms in India:

Goods and Services Tax (GST)

GST is an indirect tax levied by the government on the supply of goods and services up to the final consumption level, with the availability of a set-off credit of taxes paid at previous stages. It is a comprehensive tax that includes taxes from both the central and state governments. Here's how it works:

Simplified tax structure: Launched in 2017, it replaced a complex mix of state, central and local taxes with a single unified system.
Single national market: Businesses no longer need to contend with different tax rules across states, thus making interstate trade much easier.
Lower logistics costs: GST helped reduce transport and warehousing costs by removing state-specific barriers.
Streamlined supply chains: By eliminating double taxation, GST saved businesses time and money, boosting efficiency among all major industries.

Corporate tax rationalisation

Companies, whether domestic or foreign, must pay corporate tax on their income. This rate can vary between 20% and 40%, depending on the companies' particulars. Domestic companies are registered under the Indian Companies Act and have their operations and management entirely based in India.

Foreign companies are those that are not registered under the Indian Companies Act and have their management and operations based elsewhere. Why does this distinction matter? Indian companies are required to pay tax on their overall income, just like foreign companies pay tax on the income they earn within India. Let's look at key reforms:

Major tax reform: In 2019, India reduced corporate tax rates to 22% for domestic companies (concessional) and 15% for new manufacturing ventures.
Competitive advantage: These rates are now among the most attractive in Asia, making India a strong choice for global businesses.
Boost for investment: The move was widely welcomed by both domestic and international investors.
Support for manufacturing: Lower taxes gave a major push to the Make in India initiative , helping India position itself as a global manufacturing hub.

Continuous modernisation

Modernisation through digitisation of the taxation system minimises unnecessary paperwork and promotes the active use of digital devices and online mechanisms for tax collection and tax-related data. From e-filing to e-verification, a gamut of functions has been digitised to bring in more efficiency and transparency. Here's how it works:

Digitised tax processes: India has introduced faceless assessments, online scrutiny, e-verification and digital appeals.
Less human intervention: A reduced human interface has minimised delays and improved fairness.
Faster compliance: Businesses now complete tax processes quickly and transparently.
Building trust: These reforms have boosted investor confidence, particularly among foreign and multinational companies.
Investor-friendly shift: India is building a more efficient, predictable, and investor-friendly economy, especially for foreign and multinational companies.

New Income-tax Bill, 2025: The LongTerm Vision

The New Income-tax Bill, 2025 marks a significant overhaul of India's direct tax framework, aiming to modernize, simplify, and make the system more equitable and investment-friendly. A breakdown of the rationale behind this reform is below:

Simplification of Tax Structure: The Bill replaces the complex and often confusing provisions of the Income-tax Act, 1961 with clearer language, fewer cross-references, and more intuitive formatting 1.
Alignment with Modern Economic Realities: Recognizes Virtual Digital Assets (VDAs) like cryptocurrencies and NFTs as capital assets, bringing them under the tax net.
Introduces the concept of a “Tax Year”: Aligned with the financial year, replacing the older “Assessment Year” terminology.
Middle-Class Relief and Progressivity: This proposed revision addresses inflationary pressures and improves disposable income for middle-income earners.
Administrative Efficiency: Consolidation of provisions related to TDS, assessments, and dispute resolution reduces bureaucratic delays and improves processing speed.
Encouraging Voluntary Compliance: By making the law easier to read and interpret, the Bill aims to reduce litigation and encourage voluntary compliance.
Digital Integration and Transparency: The Bill supports India's digital economy goals by integrating digital assets and enhancing transparency in tax reporting. However, it also raises privacy concerns due to expanded powers for tax authorities to access digital data.

Why tax reforms matter for investment growth

Tax reforms help make a country a better place for business. When the rules are clear and simple, more investors are attracted, businesses flourish and the economy strengthens. Let's dive into understanding what the impact of tax reforms on investments is.

Ease of doing business: Simplified tax structures have lowered barriers for both new and existing businesses. Quicker registration, compliance and payments have improved India's business environment, making it easier to do business. This serves as a significant attraction for investors seeking a business-friendly atmosphere.
Higher market efficiency: The introduction of GST has unified India's market by eliminating multiple layers of state and central taxes. Companies now benefit from reduced logistics costs, simpler supply chains and faster interstate operations. This has made it easier for businesses aiming to expand into various sectors, such as manufacturing, retail and e-commerce.
Regulatory stability: Tax policies are now more predictable and transparent, contributing to a more stable business environment. Modern compliance systems, including faceless assessments and digital appeals, have reduced uncertainties and fostered greater trust among investors. This consistency is critical for long-term investment planning, providing both domestic and international businesses with the confidence to commit larger investments to India.

Impact of corporate tax adjustments on investments

India has decided to reduce corporate tax rates, marking a key turning point for its business ecosystem. Here's how it impacts investments in the long run:

More reinvestment: Reduced corporate taxes have freed up capital for companies. As a result, businesses are increasing their investments in expanding operations, setting up new plants, exploring new markets and accelerating digital transformation initiatives.
Enhanced global competitiveness: India presents one of Asia's most appealing corporate tax rates, making it a top choice for multinational firms aiming to optimise costs and diversify their supply chains.
Support for startups and SMEs: Tax structures have been streamlined with reduced rates, promoting growth for startups and small enterprises. Enhanced access to funding and lower operational costs are allowing businesses to expand more quickly and encourage innovation in multiple sectors.

New Tax Regime for Individuals: Fostering Consumption and Investment

The optional new tax regime for individuals and HUFs, introduced in Budget 2020 and revamped in Budget 2023, offers lower tax rates with no exemptions or deductions. From FY 2023-24, this has become the default regime, offering benefits such as:

Simplified tax filing for salaried and middle-income groups.
Higher disposable income, especially for younger professionals.
Boost to retail consumption, aiding sectors like FMCG, real estate, retail, and digital services.

Though not a direct corporate reform, this shift strengthens India's consumption-led growth model, complementing the investment-driven reforms and making India a compelling market for both production and sales.

Tax Certainty Through Advance Rulings and Mutual Agreement Procedures (MAP)

India has strengthened its dispute resolution mechanisms to offer tax certainty and reduce litigation. Recent efforts include:

Revamped Advance Ruling Authority (AAR) for non-resident investors, enabling pre-transaction clarity on tax liabilities.
Enhanced access to Mutual Agreement Procedure (MAP) under tax treaties to resolve cross-border disputes amicably.
Introduction of Bilateral Advance Pricing Agreements (APAs) to ensure consistency and transparency in transfer pricing.
These measures help reduce tax-related uncertainties for foreign investors, offering confidence in long-term strategic planning.

Key tax incentives for investors

India's tax framework offers several targeted incentives designed to boost foreign investment and promote growth in key sectors. Here are the key ones:

SEZ and IFSC benefits: Businesses in Special Economic Zones (SEZs) and International Financial Services Centres (IFSCs) receive significant tax benefits, simplified regulations and improved access to global markets.
Reduced withholding taxes: India's tax framework provides reduced withholding rates on cross-border payments, thereby lowering the costs associated with foreign loans and bonds. This benefit is particularly significant for industries that are in infrastructure- or capital-intensive.
Sector-specific incentives: Certain sectors, such as infrastructure, renewable energy and affordable housing, benefit from special tax exemptions and deductions, attracting more investors.
Capital gains relief: Special exemptions on capital gains, particularly for venture capital and startup investments, facilitate investment in new ideas and businesses. This fosters innovation and entrepreneurship in emerging industries.

Prospects for FDI in India

India is becoming an increasingly strong and reliable choice for foreign investment. Progressive tax changes, more open industries and a robust digital infrastructure are bolstering investor confidence. Prospects for foreign direct investment (FDI) in India are:

Robust FDI inflows: India crossed the milestone of $1 trillion in cumulative FDI inflows from 2000 to 2014. It attracted $42.1 billion in FDI in the first half of FY 2024– 25,a 26% increase, despite global economic uncertainties. It highlights sustained investor confidence in India's economic fundamentals.
Sectoral liberalisation: The government has opened key sectors, including insurance, defence, retail and telecom—allowing more foreign companies to invest and create new business opportunities. It revised the FDI limit in the insurance sector from 74% to 100%, and similarly, in the defence sector, the limit was raised from 49% to 74% under the government route.
Growing digital economy: Initiatives like Startup India and Digital India are helping India become a global centre for technology, fintech and digital innovation. In FY 2023-24, the digital industry contributed 11% to India's GDP at $402 billion, marking a significant milestone for the digital economy. By 2030, it is expected to account for one-fifth of the national income. These changes are attracting both strategic investors and venture capital into the country.
New strategic trade agreements: The recent free trade agreements (FTAs) with countries like Australia and the UAE are enhancing India's global trade connections and facilitating easier access for investors to international markets through India. Currently, the country has Regional Trade Agreements (RTAs)/FTAs with 13 countries.

Advantages of investing in India under the current tax structure

India's updated tax system gives investors a mix of competitiveness, stability and growth opportunities.

Globally competitive corporate tax rates: India offers one of the lowest corporate tax rates in Asia, with new manufacturing setups benefiting from a 15% rate. This makes India highly attractive for global businesses looking to expand their manufacturing bases and integrate into global supply chains.
GST-enabled market access: The introduction of GST has transformed India into a single, unified national market. Companies now experience easier interstate trade, fewer regulatory barriers and major reductions in compliance costs—especially in sectors such as manufacturing, logistics and retail.
Strong R&D incentives: India offers substantial tax deductions for research and development activities. These incentives encourage companies in various sectors, such as technology, healthcare, pharmaceuticals and engineering, to innovate, build high-value products and remain globally competitive.
Regulatory predictability: Transparent digital tax systems, faceless assessments and simplified appeals have significantly enhanced India's business environment. Investors now enjoy a more predictable regulatory framework, enabling them to plan long-term operations with greater certainty and reduced risk.
Growing domestic market: India's rapidly expanding middle class and strong economic growth provide investors with access to one of the world's largest and most dynamic consumer markets. Alongside global export opportunities, companies can capitalise on the increasing domestic demand for high-quality goods, services and digital products.

ESG-Linked Tax Incentives: An Emerging Frontier

As Environmental, Social and Governance (ESG) factors gain prominence globally, India is exploring tax-related incentives to align with its sustainable development goals:

Incentives for green energy, electric vehicles (EVs), and circular economy initiatives.
Proposed tax credits for investments in decarbonisation technologies.
Extended tax holidays for green infrastructure, including EV charging stations, bioenergy, and sustainable housing.
These incentives are designed to attract impact investors and position India as a hub for sustainable and responsible investments.

India's tax reforms on Startup & Innovation Ecosystem:

Tax Holiday for Startups: This initiative provides significant financial relief for new businesses. Eligible startups can benefit from a 3-year tax holiday within their first 10 years of incorporation. This means that during this period, they are exempt from paying income tax on their profits, allowing them to reinvest those savings into their growth and development. This policy is designed to encourage entrepreneurship by reducing the financial burden during the critical early stages of a startup's lifecycle.
Section 80-IAC Benefits: Under Section 80-IAC of the Income Tax Act, eligible startups can avail themselves of tax deductions on profits. This provision is aimed at promoting the growth of startups by reducing their taxable income, thus enabling them to retain more of their earnings.
Angel Tax Relief: Angel tax provisions have historically posed challenges for startups, as they involve scrutiny of investments received from angel investors. However, exemptions for DPIIT-recognised startups offer relief from these provisions. This exemption is crucial for startups seeking early-stage funding, as it reduces the regulatory hurdles and potential tax liabilities associated with angel investments. By easing these constraints, startups can attract more investment, fostering a vibrant ecosystem for innovation and growth.²¹

Tax Reforms for Financial Sector Growth

IFSC GIFT City: The International Financial Services Centre (IFSC) at GIFT City is a strategic initiative aimed at positioning India as a global financial hub. Units established in IFSC GIFT City benefit from a 100% tax exemption for 10 consecutive years. This tax incentive is designed to attract international businesses and financial institutions to set up operations in India, thereby enhancing the country's competitiveness in the global financial market. By offering such exemptions, the government aims to foster an environment conducive to financial innovation and growth, encouraging foreign investment and boosting employment in the sector.²²
No Capital Gains Tax on Certain Securities: Transactions conducted through IFSC exchanges are exempt from capital gains tax on specified securities. This reform is particularly attractive to investors and financial institutions as it reduces the tax burden associated with trading activities. By eliminating capital gains tax on these transactions, the government aims to increase trading volumes and liquidity in the IFSC, thereby enhancing its appeal as a preferred destination for financial services and investment activities.²³
Zero Tax on Interest Income for Non-Residents: Non-residents earning interest income from certain bonds and loans routed through the IFSC are exempt from taxation. This measure is intended to attract foreign capital by making it more lucrative for non-residents to invest in Indian financial instruments. By offering zero tax on interest income, the government seeks to increase foreign participation in the Indian financial markets, thereby boosting capital inflows and supporting economic growth.

India's tax reforms are building the future of investment

India's tax reforms have strengthened the foundations for a more resilient and investor-friendly economy. Simplified compliance, competitive corporate tax rates and a unified GST market have made India a strategic choice for global businesses.

India continues to focus on transparency, efficiency and alignment with global markets, creating a dynamic platform for sustainable investment and long-term growth.

As the next decade unfolds, India is poised to emerge as one of the world's most attractive destinations for long-term investments. It offers investors a rare combination of scale, stability and sustained growth, driven by its progressive and forward-looking tax policies.