By Mukesh Butani & Pranoy Goswami, respectively managing partner and senior associate with the tax policy team at BMR Legal

“For cooperation to prove stable, the future must have a sufficiently large shadow. This means that the importance of the next encounter between the same two individuals must be great enough to make defection an unprofitable strategy. It requires that the players have a large enough chance of meeting again and that they do not discount the significance of their next meeting too greatly.”—Robert Axelrod, The Evolution of Cooperation

The spectre of the tariff announcements by US President Donald Trump has led to rhetoric and clandestine anxiety on the windowsills of global policymakers. The predicament for the Indian government, grappling with a strenuous and almost macabre 50% tariff, has been subject to consternation and expectant policy rejigs. Often, a policy mandate is second-guessed through guffaws emanating from a surround-sound lyceum. The relevant question was: How shall the government mobilise a sustainable yet dynamic parlay of tax, tariffs, and trade to drive consumption and facilitate industrial bonhomie?

Prime Minister Modi’s last month’s visit to the Shanghai Cooperation Organisation Summit and his redolent interactions with the Russian and Chinese premiers fuelled worldwide interest, as India sought to realign its economic partnership without compromising on the border related friction with China. Buoyed by such ebullient international re-posturing, the Goods and Services Tax (GST) Council’s announcements on rate rationalisation and operationalisation of the GST Appellate Tribunal presents an opportunity to leverage the domestic mood and push for deeper reforms.

However, the GST system, being hailed over the last fortnight, continues to be a work in progress, having addressed conundrums of cess, inverted duties, and classification challenges. As the government works up the alley to fix these and restructure its indirect tax regime, a cursive glance at its international trade and tariff landscape merits trenchant analysis. A shoehorn catapult in domestic consumption and hors d’oeuvres with a pecking order solves one part of the puzzle.

A doctrinaire and fundamental ascertainment on the policymakers’ grid should be the action path to calibrate its order with the US. It retracts to the initial hypothesis by Axelrod: India and the US must strengthen and simplify their trade expectations to build a moor of trust and solidarity. The India-US Bilateral Trade Agreement was poised to redefine the contours of strategic cooperation in digital technologies. With the Terms of Reference finalised, and the maudlin calm torqued by sinewy announcements, India would do well to reshuffle its cards to encompass semiconductors, artificial intelligence (AI), critical minerals, and subsea cable infrastructure as the cynosure. These sectors are not merely economic engines; they are the substratum of digital sovereignty and geopolitical influence. India’s stance in these negotiations reflects its aspiration to become a global hub for tech innovation.

While money doth bring home the bacon, it is the intent backed by rational stakeholder discussions which augment all-inclusive reforms. India’s economic apparatus does need deeper reforms to address its regulatory and tax landscape. Given its tech potential, the tax regime for foreign tech operators needs clearer articulation and certainty. Budget 2025 introduced a presumptive tax regime for non-residents providing tech services, taxing 25% of gross receipts at an effective rate below 10%. While this is a step forward, the broader landscape is riddled with asymmetries. Issues like permanent establishment and profit attribution persist, much to the chagrin of investors, especially in data centre operations.

The absence of a unified framework under the One Big Beautiful Bill Act in the US similarly leads to inconsistent interpretations of tax obligations, especially for American tech firms operating cloud services, AI infrastructure, and data centres. Drawing from the Organisation for Economic Co-operation and Development (OECD) Report on the Attribution of Profits to Permanent Establishments and the Global Anti-Base Erosion Rules under Pillar Two, India should consider aligning its profit attribution and nexus rules with global standards to ensure predictability, and plurality of reforms. Silence on the policy front is raising the anxiety level amongst US tech giants, in addition to uncertainty due to geopolitical reasons.
Understandably, India’s stance on these matters must evolve in tandem with its trade ambitions.

The OECD has long advocated for clarity in digital taxation, and India’s alignment with multilateral norms could significantly aggrandise investor confidence. It’s a question of time that the trade deal will fructify in future, but it ought to be accompanied by swift, targeted tax reforms, especially for subsea cables, data centres, and AI-driven enterprises as part of India’s domestic policy framework. Data centres are capital-intensive, with long gestation periods and high operational costs.

India’s investment grid showcases over $25 million in active projects, and it is incumbent on part of India to signal targeted policy which shall entail clarity on vexed issue of profit attribution to permanent establishment, and clarity on concessional tariffs, and investment allowances for tier-II cities. These measures, if institutionalised, could position India as a global data hub, attracting investments from tech giants who have evinced interest. Timing of a comprehensive policy is critical given the speed of implementing such AI driven investments including competition from other jurisdictions with many nations in the Asian region attracting tech giants to their shores.

The potential for India is immense, but equally time-bound. India’s competitive landscape and manpower arbitrage is an opportunity for the next 20 years and investors are in a rush to make decisions. India’s global capability centres (GCCs) employ over 1.9 million professionals and generate $64.6 billion in revenue as of December 2024. GCC potential prominently featured in the annual economic survey of 2024. With the right fiscal support, this could rise up to $105 billion and 2.8 million jobs by the end of the decade. Strategic partnerships with the US industry forums, coupled with infrastructure support and regulatory simplification, could usher in a new era of digital diplomacy.

The centennial fiesta in 2047 notwithstanding, India’s policy edict should address the low-hanging fruit in the tax and trade regime to build a resilient digital economy. To truly catalyse investment in subsea cables, data centres, and AI infrastructure, India must go beyond a head splice of moolah; it must couple them with targeted incentives and imbue them with regulatory certainty. Investors thrive in the Eden of predictability, certainty, and efficiency. This alludes to a coordinated approach where the department of revenue actively partners with the ministry of electronics and information technology and the Prime Minister’s Office to align fiscal policy with national digital priorities, even as GST realignments herald a sunup on domestic proliferation for goods and services. Forged in the crucible of dialogue and best practices, India would do well to serenade investors galore with its reforms.

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