NEW DELHI, February 1, 2026, 19:00 IST
- A budget adjustment now allows foreign companies to provide machinery to Indian contract manufacturers without creating a taxable “business connection” for a period of five years
- Apple is pushing for clearer terms while ramping up iPhone production, with suppliers mostly footing the bill for equipment to sidestep tax issues
- Relief applies only to export-driven bonded zones; any domestic sales from these areas will continue to incur import duties
On Sunday, India revised its income-tax rules in the 2026/27 budget to allow foreign companies to supply machinery to local contract manufacturers in select zones for up to five years without facing tax risks. This move clears a major hurdle for Apple’s manufacturing expansion in India. Arvind Shrivastava said the government would “exempt you for 5 years” to provide firms with “certainty.” 1
This matters because Apple’s iPhones in India are mostly assembled by contract manufacturers—firms that produce goods for other brands—not in Apple’s own factories. Apple had been cautious about investing in expensive machinery, fearing it might be seen as a profit-generating operation in India, which could trigger taxes on iPhone earnings.
This comes as New Delhi pushes hard to relocate more global electronics supply chains to India—and ensure they stay. Smartphone manufacturing is now a top policy focus for Narendra Modi’s government, promoted as a key source of employment.
The crux lies in the phrase “business connection” from Indian tax practice. It’s a broad term—essentially a taxable link—that can drag a foreign company into disputes over whether it owes income tax on domestic earnings.
Finance Minister Nirmala Sitharaman outlined in the budget documents an exemption for foreign firms supplying “capital goods, equipment and tooling” to a “toll manufacturer” operating in a bonded zone. Toll manufacturing means the brand owner contracts production, paying a fee for the service.
The relief applies through the 2030-31 tax year and is restricted to customs-bonded zones, which are considered outside India’s customs territory; phones sold domestically from these areas will still incur import duties. “This exemption removes a key deal-breaking risk,” said Shankey Agrawal, partner at BMR Legal. Counterpoint Research reports iPhones now make up 8% of India’s smartphone market—double their 2022 share—and India’s slice of global iPhone shipments has risen to 25% since 2022. 2
This shift might reshape who cuts the first, largest cheque. Apple’s main India partners—Foxconn and Tata Electronics—have invested billions in machinery, partly to shield Apple from tax battles tied to equipment ownership.
Samsung of South Korea takes a different approach, producing most of its phones in its own factories in India. This strategy keeps the company less vulnerable to issues around foreign brands owning equipment within a supplier’s facility.
The machinery exemption is part of a budget aimed at prioritizing manufacturing, though it failed to excite investors. On Sunday, stocks dropped by almost 2%, and Moody’s Ratings’ Christian de Guzman described the budget as “tactical” rather than groundbreaking. 3
Industry lobbyists greeted the tax clarity with approval. Pankaj Mohindroo, chairman of the India Cellular and Electronics Association, noted that the five-year exemption in bonded zones, along with other measures, would “reduce compliance friction” and boost investor confidence. 4
The fine print is crucial. This benefit applies only to export-oriented bonded zones and within a set timeframe. It doesn’t eliminate import duties on goods brought into India, which may restrict planning for certain production lines.
Apple hasn’t responded yet to the budget change. The move comes after months of talks with Indian authorities about tax issues related to equipment. It provides global electronics companies a smoother way to finance machines in India without sparking new debates over whether they’ve “set up shop.”
