India Budget Removes Tax Risk for Foreign Machinery in Customs Bonded Areas

The Government of India INunveiled its 2026-27 budget on Sunday, introducing a strategic five-year tax exemption that addresses a significant hurdle for the electronics manufacturing sector. During the annual budget presentation, Finance Minister nirmala sitharaman announced that the government will implement law changes to ensure that the mere ownership of machines by a foreign company does not lead to domestic tax liabilities. This measure specifically applies to machinery provided to contract manufacturers operating within customs-bonded areas, marking a shift in how foreign-owned capital equipment is treated under local law to promote the manufacturing of electronic goods.

Revenue Secretary arvind shrivastava clarified the scope of the new policy at a post-budget press conference, noting that the government is exempting foreign-owned machines used by local manufacturers for a five-year period. According to an explanatory budget document, the exemption will be available until the 2030-31 tax year. The provision ensures that any income arising on account of providing capital goods, equipment, or tooling to a contract manufacturer, being a company resident in India, is eligible for exemption, provided the operations are conducted within designated bonded zones.