Amendment to Taxation Act, Payment and Settlement Systems Act get President’s assent

The amendment to the Payment and Settlement Systems Act, 2007 is crucial for the future of digital payments in India. Currently, a zero-MDR policy applies to UPI and RuPay debit cards, meaning neither consumers nor merchants pay a fee for these transactions. The Merchant Discount Rate (MDR) is the fee a merchant pays to a bank for processing electronic payments. While the zero-MDR policy has exponentially driven digital adoption, it has also strained the revenue models of payment service providers. The amendment gives the government the legal backing to notify which electronic payment modes will remain free from MDR charges. The Finance Minister clarified that consumer payments will remain free, but a future MDR may apply to certain merchant transactions. The UPI and Services Steering Committee, headed by the National Payments Corporation of India (NPCI), will now decide on these charges, aiming to balance digital inclusion with a sustainable revenue model for the payment ecosystem. This highlights the ongoing debate between treating digital payment infrastructure as a public good versus a commercial service.

These amendments represent legislative action to provide policy certainty, a key requirement for attracting long-term foreign investment. The Taxation and Other Laws (Amendment) Act, 2026 replaces a prior ordinance. Ordinances are temporary laws promulgated by the President under Article 123 when Parliament is not in session, and they must be approved by Parliament within six weeks of its reassembly to become permanent Acts. This legislation provides vital Income Tax exemptions for Foreign Portfolio Investors (FPIs) on interest income and capital gains from Government Securities (G-Secs). By relaxing the conditions required to ensure a fund's global income isn't taxed in India, the government aims to encourage global fund managers to relocate to Indian shores, reflecting a push towards making India a global financial hub. This demonstrates how taxation policy is used as a tool for economic statecraft to attract foreign capital and expertise.

The taxation amendment strategically targets the Make in India initiative, specifically in electronics manufacturing. It extends income tax exemptions until 2040-41 for foreign companies that engage contract manufacturers in India for specified electronic goods (like laptops, servers, and mobile phones). Crucially, to bolster the supply chain ecosystem, the Act also proposes a 15-year IT exemption for foreign companies storing components in customs warehouses for supply to domestic manufacturers. This long-term commitment provides the predictability necessary for large-scale, capital-intensive investments. Furthermore, providing 'process certainty' for foreign cloud companies utilizing Indian data centers aligns with the broader push towards digital sovereignty and data localization, while simultaneously attempting to make India an attractive destination for global tech infrastructure investments. This illustrates the government's approach of using targeted fiscal incentives to build domestic capacity in critical sectors.