The Lok Sabha has passed the Taxation and Other Laws (Amendment) Bill, 2026, providing long-term tax holidays for electronics contract manufacturers and easing rules for foreign cloud providers. The legislation also amends the Payment and Settlement Systems Act, granting the government power to introduce Merchant Discount Rates (MDR) on UPI and RuPay transactions, ending the mandatory zero-fee era.
On August 6, 2026, the Lok Sabha passed the Taxation and Other Laws (Amendment) Bill, 2026. The legislation is designed to strengthen India’s position as a global electronics manufacturing hub while introducing significant changes to the digital payment ecosystem and foreign investment framework.
Incentives for Electronics Manufacturing
The government has extended income tax exemptions until March 31, 2041, for foreign companies that utilize contract manufacturers within India. This 15-year tax holiday covers the production of electronic goods, including mobile phones, laptops, and servers, as well as the storage of electronic components in customs-bonded warehouses before they are supplied to domestic manufacturers. By providing this long-term tax certainty, the policy aims to encourage multinational firms to shift supply chains to India, reducing reliance on imports for critical components.
Cloud Services and Data Centers
The bill also addresses operational hurdles for foreign cloud service providers. By removing previous requirements for government approvals and notifications, the law allows these firms to operate using leased infrastructure in Indian data centers. This change is intended to simplify entry for global technology companies, potentially increasing the demand for data center capacity within the country.
Shift in Digital Payment Regulations
A notable change in the legislation involves the Payment and Settlement Systems Act, 2007. By delinking this act from the Income Tax Act, the government now has the legal authority to specify Merchant Discount Rates (MDR) for UPI and RuPay transactions. Since the inception of these digital payment modes, users and merchants have largely operated under a zero-MDR regime, meaning no transaction fees were charged.
While the government has not yet announced the implementation of any fees, this legislative change allows for the possibility of future charges. Investors in the fintech, banking, and digital payment sectors are expected to monitor whether the government eventually decides to introduce these levies, as such a move could influence merchant adoption and overall transaction volumes in the digital economy.
Investment and Fund Management
The bill further aims to improve India's appeal to global investors by providing tax relief on interest income and capital gains for Foreign Institutional Investors (FIIs) investing in government securities. Additionally, it streamlines conditions for foreign funds relocating to India, making it easier for global managers to base operations in the country.
The next steps for investors will be to track government notifications regarding the specific conditions for data center operations and any future guidelines on payment system charges. These updates will clarify the immediate operational impact for cloud service providers and the digital payment ecosystem.