For much of the past three decades since 1991, the global investment narrative around India was straightforward: a large consumer market with rising income where global products could be sold. Increasingly, however, that narrative is changing. India is no longer positioning itself simply as a destination where multinational corporations sell products or source talent. It is making a more ambitious proposition; it wants to be the location where multinational companies manufacture and sell to the world. The economy grew 7.7 per cent in FY2025-26i, and 7.8 per cent in Q1 of FY26-27 despite all odds and gross FDI inflows for last year reached a record of about USD95 billion.
Across the world, governments and corporations are committing unprecedented capital towards semiconductors, artificial intelligence infrastructure, data centres, clean energy, electric mobility, advanced manufacturing and supply-chain diversification. India is seeking to position itself as a promising alternative in this super capex cycle, not merely as a domestic consumption-based market, but as a location where global companies can invest, manufacture, innovate and serve international demand.
Make in India (2014)ii made manufacturing a national priority and was accompanied by step-by-step liberalisation of FDI rules in several sectors. Atmanirbhar Bharat (2020)iii added a second goal: domestic capability and supply-chain resilience in strategic sectors, supported by incentives linked to output as compared to past protectionist measures. Since then, the Government also focused on what a factory needs beyond its own gates. PM Gati Shakti and the National Logistics Policy bring infrastructure planning across ministries onto one platform. The National Single Window System brings Central and State approvals into one portal. The National Manufacturing Mission announced in the 2025-26 Budget is being taken forward by an inter-ministerial committee.iv The 2026-27 Budget went further, prioritising seven strategic and frontier sectors, including semiconductors, electronics components, biopharma, rare earths and capital goods.v The manufacturing ambition is also increasingly extending from ‘Make in India’ towards ‘Make in India, Make for the World’, with greater emphasis on exports, global competitiveness and participation in global value chains.vi
In recent years, India has introduced a series of tax reforms and incentives aimed at improving certainty, reducing friction and aligning its fiscal framework with long-term capital deployment.
A. Incentives and market access
The incentive architecture has evolved in parallel, and its trajectory tells investors more than any single scheme. The first generation was broad: tax concessions, capital subsidies and area-based exemptions, largely unconditional on output. The Production Linked Incentive (PLI) schemes introduced from 2020 changed the design principle by paying on incremental sales achieved rather than investment promised. By March 2026 the fourteen PLI schemes had attracted actual investment above INR2.4 lakh crore and over 14 lakh direct and indirect jobsvii; cumulative incentive disbursement of INR28,748 crore as on 31 December 2025viii shows that outcome-linked incentives are, by design, back-ended and claim-driven.
The next generation of schemes goes deeper into the value chain. The Electronics Component Manufacturing Scheme, notified in April 2025, supports components, sub-assemblies and materials rather than finished devices; 106 projects had been approved by August 2026, of which 38 plants had started manufacturing.ix In semiconductors, twelve manufacturing units were approved under the first phase of the India Semiconductor Mission, and three assembly-and-test facilities have begun commercial production. Semicon 2.0, approved by the Cabinet in July 2026 with an outlay of INR1,27,500 crorex, extends support to chip design, manufacturing equipment, materials, chemicals and gases.
State policy has moved in step. Under India’s federal model the Centre sets sectoral programmes while States compete for projects with capital investment subsidies, SGST-linked reimbursements, interest subvention, electricity duty and stamp duty relief, employment and skilling support, land and infrastructure assistance and, increasingly, customised packages for large or strategic projects negotiated through empowered committees. Eligibility, quantum and the mechanism of payment vary by State, sector and project size, and no benefit should be assumed to be available everywhere.
For a sophisticated investor, the question is no longer which State or scheme offers the largest headline subsidy. The more relevant assessment is which combination of location, market access, infrastructure, supplier base, talent, logistics, policy framework and incentive package produces sustainable long-term economics.
Incentives alone do not create globally competitive manufacturing ecosystems. Equally important is the ability of manufacturers to access overseas markets.
India’s FTA strategy is evolving to focus on partners with established economic ties and aligning agreements with India’s core industrial strengths. The recent FTAs with the U.K., Oman, and New Zealand reflect this shift, emphasising selective market opening and protection of sensitive domestic sectors.
India’s FTA strategy aims to ensure predictable market access, boost competitiveness, and integrate economies into global value chains. The country is moving away from a few major partners to a global network to insulate itself from global tariff wars and supply chain shocks.
B. Tax framework
i. Direct tax
Sector based exemptions
What sets the current cycle of reform apart is the willingness to legislate exemptions targeted at specific, strategic sectors rather than broad-based incentives alone.
Boost for contract manufacturing in electronics sector:
The global electronic market is poised to touch 4-5 trillion by 2030.xi Over recent years, industries in India have expanded from finished-product assembly toward deeper localisation of components, sub-assemblies and supporting manufacturing capabilities.
India’s electronics production has grown roughly six-fold in a decade – from about USD 31 billion (INR1.9 lakh crore) in FY 2014-15 to over USD 133 billion (INR13.1 lakh crore) and creating around 25 lakh jobs. India is now the world’s second-largest mobile phone manufacturer by volume – from barely two manufacturing units in 2014 to over 300 today.xii
India is also exporting more electronics and becoming a part of the global supply chain. The larger goal is to create a USD500 billion industry by 2030 making India a global technology leader. As per the economic survey 2025-26, electronics have become India’s third largest and fastest growing export category.
For decades, the global electronics manufacturing ecosystem has been dominated by technology leaders from the United States, Japan and South Korea, home to many of the world’s largest semiconductor, consumer electronics and device manufacturers. These multinational groups typically operate through a contract manufacturing model, under which the foreign principal retains ownership of valuable intellectual property, specialised tooling, moulds, testing equipment and other high-value production assets, while manufacturing activities are outsourced to local contract manufacturers. Similar business model has been implemented in India.
However, doing so raised a fundamental tax concern: whether the mere presence of foreign-owned manufacturing equipment and tooling at an Indian manufacturer’s premises could create a sufficient nexus in India to constitute a ‘business connection’ under domestic law or a Permanent Establishment (PE) under India’s tax treaties. Most of India’s tax treaties, including those with the United States, Japan and South Korea, define a PE as ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’.
Where specialised equipment owned by the foreign enterprise is installed at the premises of an Indian contract manufacturer and forms an integral part of the production process, questions could arise regarding whether such business activities, in substance, create a business connection or creating a PE.
Recognising this issue, the Income Tax Act, 2025 (The Act) now provides a specific exemption for income earned by a foreign company from supplying capital goods, equipment or tooling to an Indian contract manufacturer engaged in electronic manufacturing. The exemption was originally introduced up to tax year 2030-31 and has subsequently been proposed to be extended up to FY 2040-41 demonstrating the Government’s long-term commitment towards creating a globally competitive electronics manufacturing ecosystem.
Importantly, the exemption is available only where certain prescribed conditions are satisfied:
Equally significant is the breadth of the eligible product coverage. To provide certainty regarding the scope of the exemption, the term “specified electronic goods” has been defined to include:
In addition to exempting income arising from the supply of capital goods, equipment and tooling to eligible Indian contract manufacturers, the Finance Act has also introduced a separate exemption for foreign companies storing components in customs bonded warehouses for supply to Indian contract manufacturers engaged in the manufacture of specified electronic goods. The exemption, proposed to remain available until FY 2040-41, recognises that inventory management and component warehousing are integral parts of global electronics supply chains and should not, by themselves, create a business connection under the domestic tax law or permanent establishment under the tax treaties.
The exemption is available in respect of income arising from the sale of such components, subject to certain prescribed conditions. These include:
The components being supplied to an Indian contract manufacturer for use in the manufacture of specified electronic goods on behalf of a foreign company; and
Compliance with prescribed reporting and information-furnishing requirements. The definition of electronic goods is the same as mentioned above
Together, these measures provide greater certainty to multinational electronics companies adopting a contract manufacturing model in India and strengthen India’s position as an attractive destination for global electronics production and supply-chain integration.
Additionally, section 46 of the Act also provides a tax incentive for businesses engaged in semiconductor wafer fabrication. Under this regime, taxpayers are entitled to a 100 per cent deduction of eligible capital expenditure, both pre-commencement and post-commencement of operations except for expenditure on land and goodwill.
At the same time, the incentive has been carefully ring-fenced wherein loss arising on account of section 46 can be set off only against income chargeable under the head Profits and Gains of Business or Profession (PGBP) and cannot be adjusted against income under other heads. Further, unlike normal business losses which are subject to the eight-year time limit for carry forward, businesses can utilise losses under section 46 against future business profits without any time limit. However, this deduction shall not be available to companies who have opted for the concessional tax regime under section 200 of the Act.
Given India’s semiconductor ambitions extend well beyond wafer manufacturing, through the India Semiconductor Mission (ISM) 2.0, the Government has articulated a significantly broader vision encompassing the entire semiconductor and electronics value chain, including assembly, testing, marking and packaging (ATMP), outsourced semiconductor assembly and testing (OSAT) facilities, compound semiconductors, sensors, display technologies, semiconductor equipment, specialised materials, design-linked activities and ancillary supply-chain participants. Against this backdrop, there may be merit in considering an expansion of the Section 46 regime beyond wafer fabrication activities to cover a wider range of semiconductor ecosystem participants.
The data centre opportunity
If electronics manufacturing represents the physical infrastructure of the digital economy, data centres represent its nervous system.
India currently generates nearly 20 per cent of global internet traffic and accounts for only 2-3 per cent of global data-centre capacity. India’s data-centre market is expected to grow from roughly USD 1.7 billion in FY26 to USD 6.8 billion by FY30, while its share of global capacity is projected to nearly double to around 5 per cent over the same period.xiii
India’s rapid digitalisation, AI adoption and cloud consumption are creating substantial demand for data infrastructure. Industry estimates indicate that installed data-centre capacity could grow materially over the coming decade, with hyperscale cloud providers expected to account for an increasing share of demand.
What makes this particularly attractive from an investment perspective is the multiplier effect. Every gigawatt of capacity requires construction, electrical infrastructure, cooling systems, backup power, engineering expertise and ongoing operational supportxiv. In other words, data-centre growth stimulates an entire ecosystem of industrial activity. The broader infrastructure value chain associated with this build-out could create a USD 30 billion opportunity by FY30, rising to approximately USD 90 billion by FY35
Recognising this trend, recent tax measures provide exemptions for income earned by a foreign company from procuring data centre services from a specified Indian data centre is now exempt, for a period extending to tax year ending 31 March 2047, subject to conditions, principally that the foreign company neither owns nor operates the physical infrastructure, and that services to Indian users are routed through an Indian reseller.
The income of the resident Indian company providing data-centre services continues to be determined under the normal provisions of the Income-tax Act. Further, where the Indian data-centre company is an associated enterprise of the foreign cloud-service provider and is remunerated on a cost-plus basis, a safe harbour margin of 15 per cent has been prescribed for determining the arm’s length remuneration
The exemption complements a broader policy agenda encompassing data localisation, the Digital Personal Data Protection regime, and the IndiaAI Mission
While the exemption is a significant step towards establishing India as a regional digital infrastructure hub, an equally important question is whether the relief merely facilitates the procurement of Indian data centre services by foreign cloud providers or whether it also effectively insulates the foreign cloud provider’s SAAS based revenue (earned through Indian resellers) from Indian taxation.
A related question is whether the principles laid down by the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd could provide guidance on the taxability of SAAS based revenue earned by such foreign companies. Clarity on this issue by the administration would be helpful.
