Beyond handshakes, the EU-India FTA is quietly reshaping taxes—impacting corporates, exemptions, and compliance in ways most people miss.

The “Yeah, Whatever” Phase is Over

Let’s be honest with each other. When we see news headlines about “Free Trade Agreements” (FTAs), most of us have the same reaction. We see photos of diplomats in expensive suits shaking hands, we read quotes about “historic partnerships,” and then we scroll past it to see what’s happening in the stock market or who won the cricket match.

Why? Because usually, these things feel abstract. They feel like they belong in a policy briefing, not on our desks on a Tuesday morning.

But the proposed EU-India FTA is different. If you are in finance, run a business, or handle compliance, you need to sit up and pay attention. While the politicians are discussing tariffs, a tectonic shift is happening in the background involving taxes, audits, and compliance.

This isn’t just about moving goods across borders easily; it’s about the money that follows those goods. And where money moves, the taxman follows closely behind.

I wanted to write something that cuts through the heavy legal jargon. No complex section citations, just a straight talk on what this really means for the bottom line of Indian businesses.

1. EU-India FTA – The Corporate Tax Gambit: The Government’s “Samosa Strategy”

Let’s start with the biggest question I hear: Is the government crazy?

On the surface, an FTA sounds like bad math for the exchequer. If India lowers customs duties on European goods, the government collects less revenue at the ports. Why would they voluntarily give up cash?

They aren’t. They are just changing the collection point. I call it the “Samosa Strategy.”

Imagine the government is selling samosas. Right now, they sell 10 samosas with a high tax margin (high customs duty). They make decent money. Under the FTA, they plan to drop the tax margin significantly. But, they expect the volume of trade to explode. Instead of 10 samosas, they expect Indian companies to import raw materials cheaply, add value, and sell 1,000 samosas globally.

The bet is simple: Lose ₹100 in customs duties today to gain ₹150 in Corporate Tax tomorrow due to higher volumes.

It’s clever. But there is a catch. This only works if Indian companies actually pocket the difference as profit. If the market is super competitive, those “savings” from cheaper imports might just be passed on to the customer as lower prices. If that happens, profits stay flat, and the tax collection doesn’t jump. It’s not a guaranteed jackpot for the government; it’s a calculated risk.

2. The Winners, Losers, and the Confused in EU-India FTA

When this deal goes through, the mood in corporate offices across India is going to vary wildly depending on what sector you are in.

The Winners: If you walk into the offices of an IT Service giant in Bangalore, a textile exporter in Tirupur, or a Pharma company in Hyderabad, the vibe is going to be electric. The EU is a massive, wealthy market hungry for services and generics.

• The Tax Angle: Their “Export Turnover” is going to skyrocket. While direct export tax exemptions are mostly things of the past, their sheer taxable base is going to expand hugely. CAs in these sectors will be very, very busy.

The Losers: Now, walk into the office of a domestic manufacturer of high-end consumer goods, certain alcoholic beverages, or luxury items. The mood? Tense. European brands are giants. If they enter India with lower duties, domestic players with thinner margins will feel immense pressure on their pricing power.

• The Tax Angle: Shrinking margins mean lower profits, which means less tax paid. We might see consolidation or M&A in these sectors as a survival tactic—which brings its own tax complexities.

The Confused: The Auto sector. They get cheaper European tech and parts (Yay! Lower input costs). But they face stiff competition from fully assembled European cars (Oh no!). Their P&L statements are going to be a rollercoaster for a few years.

3. Transfer Pricing: The Coming Storm due to EU-India FTA

Okay, enough fun. Let’s get serious. If I had to bet my house on one area where tax litigation is going to explode post-FTA, it’s Transfer Pricing (TP).

This is where the real friction will happen.

As trade barriers fall, European companies won’t just ship goods; they will set up deeper roots in India. Indian companies will set up subsidiaries in Germany and France. Suddenly, you have related parties transacting across borders constantly.

• Royalty payments for a French brand name.
• IT support services billed from Pune to Berlin.
• Management fees paid to a Headquarters in Amsterdam.

Why is this a problem? The Indian revenue authorities are notoriously aggressive about “Arm’s Length Pricing.” They always suspect that multinational groups are pricing these internal transactions incorrectly to shift profits out of high-tax India into lower-tax jurisdictions.

When the volume of these cross-border transactions triples under the FTA, the scrutiny will triple too. The tax department is going to demand robust documentation for every single rupee sent to a related entity in Europe. If your TP study is weak, or if you are relying on “standard templates,” you are walking into a minefield of adjustments and penalties.

4. Profit Shifting: The “Old Tricks” Are Dead due EU-India FTA

Ten or fifteen years ago, international tax planning was a bit like the Wild West. Companies would route investments through specific countries just to take advantage of a favorable tax treaty, even if they had zero real business operations there. These were “letterbox companies.”

If anyone is planning to use the EU-India FTA to revive those old tricks, stop now.

The global tax environment has changed completely. India is fully on board with the BEPS (Base Erosion and Profit Shifting) framework. The new FTA will almost certainly come baked with modern anti-avoidance measures like the “Principal Purpose Test.”

The Reality Check: The taxman is now obsessed with one word: Substance. You cannot just set up an entity in Ireland or the Netherlands to route your sales. The authorities will ask: Do you have real employees there? Do you have a physical office? Are key decisions actually made there?

If the answer is “No,” the treaty benefits will be denied. The FTA is a highway for legitimate business, not a loophole for tax avoidance. Structures that worked in 2012 will be dismantled by tax officers in 2026.

5. Withholding Tax (TDS): The Daily Headache

We often forget about Withholding Tax (WHT) until the 7th of the month when the challan is due. But it’s about to become a major operational pain point.

With increased interaction with the EU, there will be a massive surge in foreign remittances for royalties, fees for technical services, and interest payments.

The Operational Trap: Let’s say your Indian company needs to pay a vendor in Italy. You want to use the beneficial lower withholding rate from the India-Italy Double Taxation Avoidance Agreement (DTAA). To do that, you need paperwork. Tax Residency Certificates (TRC), Form 10F, no-PE declarations.

If the FTA leads to a 200% increase in the number of foreign vendors you deal with, your compliance burden just tripled. If you slip up on the documentation, the tax department will deny the treaty benefit and demand tax at the highest rate—plus interest. It’s a silent cash-flow killer that many CFOs aren’t factoring in yet.

6. The New Incentive Landscape: Earn It, Don’t Just Claim It is the mindset of EU-India FTA

For decades, the mindset regarding government incentives in India was simple: “I am an exporter, therefore I deserve a tax holiday.”

Those days are fading fast. The World Trade Organization (WTO) and major economic blocs like the EU generally frown upon direct export subsidies. They consider them market-distorting.

Post-FTA, don’t expect the government to give you tax breaks just for being an exporter. The incentives are shifting dramatically towards Performance and Investment.

• PLI (Production Linked Incentive): The government will reward you if you manufacture more and hit incremental sales targets, not just because you exist.
• R&D Deductions: To compete with German engineering or French innovation, India needs to up its game. We will likely see more incentives focused on genuine Research & Development spend.

The Takeaway: If your business model relies entirely on government handouts to be profitable, you are in danger. The new tax environment will reward efficiency, scale, and innovation. It’s time to stop looking for participation trophies and start training for gold medals.

7. The Hidden Variable: Administrative Chaos

Finally, let’s spare a thought for the people on the other side of the desk—the Assessing Officers.

Implementing this FTA isn’t just about changing the law; it’s a massive challenge of administrative capacity. Overnight, tax officers across India will have to understand the nuances of complex contracts with European entities, interpret new “Rules of Origin,” and deal with sophisticated transfer pricing models.

They are human. They will be overwhelmed.

The Danger for Us: When laws become complex and administrative capacity is low, the default reaction of the tax department is often to play it safe. This means denying claims, making high-pitched assessments, and letting the appellate courts sort it out later. We are likely heading into a period of increased litigation and friction as both taxpayers and tax officers navigate this new landscape.

For expert guidance on navigating these changes, learn more about our approach at Indefine