The ICC's powerful executive board, which met in New Delhi for a two-day session, gave the Indians a three-month ultimatum to grant a tax waiver for the tournament regarded as a mini World Cup and held every two years.
"The board has resolved that the 2006 Champions Trophy be held in India subject to clearance on tax matters," ICC chief Ehsan Mani said in New Delhi on Saturday.
"We understand that the government and the Board of Control for Cricket in India (BCCI) need more time. So we will wait till May.
"If they can't arrive at any decision by then, the tournament will be shifted to Pakistan who have assured us full tax exemption."
The Limited Overs Champions Trophy, which raises funds for the ICC's development program, is contested by all the 10 Test-playing nations and two qualifiers from associate members of the ICC.
India were originally scheduled to host the Champions Trophy in 2004, but the event was shifted to England and India made provisional hosts for 2006 after the Indian government dithered on granting tax exemption for the tournament.
The Indian government imposes income tax on all earnings, including gate receipts and sponsorships, for international sporting events held in the country.
India, with millions of cricket-mad viewers, has the largest television audience for the sport in the world and wants to bid for the World Cup in 2011.
The ICC's tax waiver policy was not enforced when India co-hosted two World Cups in the past, in 1987 with Pakistan and in 1996 with both Pakistan and Sri Lanka.