Overview
On 17 August 2026, President Droupadi Murmu gave her assent to two important statutes: the Taxation and Other Laws (Amendment) Act, 2026 and an amendment to the Payment and Settlement Systems Act, 2007. Both bills had been passed by Parliament on 10 August 2026. The changes aim to boost foreign investment, strengthen domestic electronics production and give the government flexibility to modify the zero‑MDR regime for digital payments.
Key Developments
- The taxation amendment provides process certainty for foreign cloud providers to use Indian data centres and extends income‑tax exemptions for foreign firms that contract Indian manufacturers of electronics until FY 2040‑41.
- The payment‑systems amendment legally empowers the government to alter the Merchant Discount Rate (MDR) framework for UPI and NPCI‑run services.
- Future MDR charges, if any, will be decided by the UPI and Services Steering Committee and will apply only to selected merchant categories, keeping consumer‑level UPI transactions free.
- The amendment replaces a June‑5 ordinance that exempted interest and capital‑gain income of FPIs from tax on G‑Sec holdings.
Important Facts
- Tax exemption for foreign firms using Indian contract manufacturers covers mobile phones, laptops, PCs, tablets, servers and related components.
- Foreign companies storing components in customs warehouses for onward supply to Indian manufacturers receive a 15‑year income‑tax holiday (till FY 2040‑41).
- Current law prohibits banks and payment‑system providers from levying any fee on UPI and RuPay debit‑card transactions.
- The government can now issue a notification to declare which electronic payment modes remain free from MDR, providing policy flexibility.
Exam Relevance
These amendments intersect with several GS papers. GS‑2 (Polity) covers the constitutional role of the President in law‑making. GS‑3 (Economy) examines foreign direct investment incentives, tax policy, and the digital payments ecosystem. Understanding the MDR framework is crucial for questions on financial inclusion and fintech regulation. The push for domestic electronics aligns with the “Make in India” agenda, a frequent topic in GS‑3 and GS‑4 (Ethics) discussions on sustainable industrial policy.
Way Forward
Implementation will require clear notifications from the Ministry of Finance and coordination with NPCI to define MDR‑free categories. Monitoring the impact on foreign investment flows and domestic electronics output will be essential for future policy tweaks. Aspirants should track subsequent Gazette notifications and any parliamentary debates that may refine the scope of tax exemptions or MDR adjustments.