The Taxation and Other Laws (Amendment) Bill, 2026 was cleared by the Lok Sabha on Thursday without discussion as continued sloganeering by Opposition members disrupted proceedings, according to The Times of India. The legislation will replace the Income-tax (Amendment) Ordinance, 2026 and introduce comprehensive tax and regulatory changes aimed at drawing more foreign capital into India, supporting domestic electronics manufacturing and providing 'process certainty' to make it easier for overseas cloud companies to use data centres located in the country. The Bill seeks to delink the Payment and Settlement Systems Act from the Income Tax Act and provide a legal framework under which the government can alter the existing zero-MDR regime for UPI and RuPay card payments, as reported by The Times of India. The proposed changes seek to exempt Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS) from tax on interest income and capital gains arising from investments in Government securities, subject to prescribed conditions. The Bill has been passed by the Lok Sabha and will now be taken up by the Rajya Sabha for consideration, as confirmed by Business Standard.
The most immediate consumer and merchant-facing reform comes via proposed amendments to the Payment and Settlement Systems Act, 2007. Under current laws, banks and payment system providers are strictly barred from levying a Merchant Discount Rate (MDR) on transactions routed through UPI and RuPay debit cards. The new Bill, however, scraps this statutory 'zero-MDR' provision and grants the government the flexibility to selectively reintroduce MDR on certain digital transactions. RBI Governor Sanjay Malhotra on Wednesday called it a 'premature deduction' and stated that "it is very premature to say something on it, let's wait and watch for the development, ultimately it is the consumers who pay but it may not be the general consumers." According to PTI, the government is likely to permit banks and payment service providers to levy a merchant discount rate of between 0.25% and 0.4% on UPI transactions exceeding ₹2,000 when payments are made to businesses, while person-to-person transfers are expected to remain exempt. Business Standard reports that the industry believes a fee structure for merchants accepting UPI is still some time away, with an MDR on UPI likely to be in the 0.2-0.4% range, lower than debit and credit cards which currently range from 0.4-0.9% for debit cards and 1.5-2% for credit cards. As per The Times of India, official estimates suggest setting the threshold at ₹2,000 would bring only about 5% of all UPI transactions within its scope, but these transactions account for nearly 65% of the total value processed through the platform. UPI recorded 23.7 billion transactions in July, with the total value estimated at ₹29.9 lakh crore, meaning routine purchases such as milk, vegetables, groceries, or payments for auto-rickshaw and taxi rides are unlikely to be affected. Datanomics analysis reveals that only about 4% of UPI merchant transactions may attract an MDR under the proposed law, while all person-to-person UPI payments would remain free, with one in every 25 UPI payments to businesses potentially drawing a fee when the Bill is implemented.
The Bill introduces significant reforms for India's rapidly growing data centre sector, with proposed amendments removing approval requirements for foreign cloud service providers and Indian data centre owners to avail tax exemptions until 2047, according to Business Standard. The legislation removes the requirement for separate central government notification of foreign companies and specified data centres for availing of the existing tax exemption until March 31, 2047. The Bill expands the definition of 'specified data centre' to include facilities operated by an Indian company under a lease model of ownership, bringing such facilities within the existing tax framework. As per KPMG India's Himanshu Parekh, the current conditions are applied at three levels: foreign companies to be notified, the specified data centre operated by the Indian entity to be notified, and the data centre to be owned and operated by Indian companies. "This helps a lot as you don't need to approach the government," Parekh explained. The proposed changes will allow Indian data centres to be run on a leased basis rather than only under direct ownership, creating a much larger and more flexible ecosystem of Indian data centres serving global cloud players. Finance ministry officials said the earlier ownership-only condition was found to be restrictive, and the notification requirements are being dropped to improve ease of doing business. According to Nasscom, removing the requirement to notify foreign companies reduces the risk that tax certainty depends on the entity named in an approval, with the better test being whether the statutory conditions are met.
The Lok Sabha's passage of the Taxation and Other Laws (Amendment) Bill, 2026, is expected to accelerate investments in India's growing data centre sector by recognising leased facilities under the tax framework and removing notification requirements, industry experts say. Amit Sarin, managing director of Anant Raj, said the measures could attract greater global investment while supporting the expansion of hyperscale and AI-ready data centre capacity in India. He added that the reforms would also benefit Anant Raj, which has committed to invest more than ₹20,000 crore in its data centre and cloud services business over the next four to five years. Ravi Mahajan, tax partner at EY India, said the amendments reduce approval requirements for both foreign companies and Indian entities in the supply chain, cutting uncertainty and speeding up investments. "In addition, allowing lease operation of such a data centre by the Indian company rather than mandating ownership would ease set-up costs. This will improve the competitiveness of Indian data centres from a global markets standpoint," Mahan said. According to Savills India, new data centre capacity additions in India surged to 258 megawatts (MW) IT in the first half of 2026, compared to 162 MW IT in H1 2025, up 59.3 per cent year-on-year, taking the country's total operational stock to 1.8 GW IT. The reforms are expected to encourage sale-and-leaseback transactions, dedicated data centre platforms, infrastructure funds, and eventually, specialised real estate investment trust (ReIT) or infrastructure investment trust (InvIT)-style monetisation models.
The larger part of the bill is aimed at making India friendlier to outside investors through comprehensive reforms. Richa Sawhney, partner-tax at Grant Thornton Bharat, told NDTV that the bill signals a calibrated shift from short-term relief to long-term competitiveness. The liberalisation of the fund management regime, incentives for electronics supply chains, facilitation measures for data centres and diamond trading, and tax relief for foreign investors in government securities collectively point towards a policy objective of attracting global capital and business activity into India. The government has proposed a major easing of Eligible Investment Fund (EIF) eligibility norms as part of efforts to establish India as a global fund management hub, according to The Times of India. Under the new framework, offshore funds seeking tax exemption on their global income will no longer have to comply with conditions such as maintaining at least 25 investors, limiting any single investor's participation to 10%, restricting investments of more than 25% of the corpus in one entity, avoiding investments in associate entities, or maintaining a minimum average monthly corpus of ₹100 crore. The Bill substantially simplifies the conditions under which offshore investment funds can avoid being treated as having a "business connection" in India. As per EY India's Tejas Desai, these changes could be among the most significant reforms for India's fund management industry in recent years, with only five out of the original 13 conditions remaining. The proposal will apply across the country, including the International Financial Services Centre, as confirmed by finance ministry officials. The government has also extended tax breaks for foreign companies supplying machinery to Indian factories making phones, laptops and tablets by 10 more years, a move intended to draw more such manufacturers to set up operations in India, with the aim of eventually generating more manufacturing jobs and cheaper devices.
Industry experts believe that the next phase of reforms would need to focus on implementation and further rationalisation of tax and infrastructure incentives. Raheel Patel, partner, Gandhi Law Associates, said the success of the reforms would depend on simple and stable implementing rules covering taxation, land, power and other regulatory aspects. "The next priority should be greater clarity in implementation, a level playing field for domestic operators, and further rationalisation of tax and infrastructure incentives to sustain investment momentum," Patel noted. According to Savills India, India's data centre market is set for significant expansion, with total capacity projected to nearly quadruple and reach over 7 GW IT by 2030. Annual average capacity additions are expected to accelerate to 350-500 MW IT between 2026 and 2030, nearly double the 150-250 MW IT added annually during 2022 to 2025, while in 2026 both capacity additions and absorption are expected to surpass 600 MW IT. The reforms are expected to encourage sale-and-leaseback transactions, dedicated data centre platforms, infrastructure funds, and eventually, specialised real estate investment trust (ReIT) or infrastructure investment trust (InvIT)-style monetisation models.
