India’s manufacturing ambition – Fiscal policy perspective

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 jobs^vii; cumulative incentive disbursement of INR28,748 crore as on 31 December 2025^viii 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 crore^x, 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:

Ownership of the capital goods, equipment or tooling remains with the foreign company;
Such capital goods, equipment or tooling are under the control and direction of the Indian contract manufacturer;

The contract manufacturer is a company resident in India and located in a customs bonded area; and
The contract manufacturer manufactures electronic goods on behalf of the foreign company for consideration

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:

Mobile phones;
Laptops, all-in-one personal computers and tablets;
Servers and ultra-small form factor (USFF) devices;

Sub-assemblies used in the manufacture of the above products; and
Hearables, wearables and accessories related to such products

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 support^xiv. 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.

Other reforms on the direct tax front

Ease of doing tax reforms:

Removal of the angel tax

One of the most significant investor-friendly reforms in recent years has been the abolition of the so-called "angel tax" under Section 56(2)(viib) of the Income-tax Act, 1961. Introduced in 2012 to address concerns around shell companies and unaccounted money, the provision frequently resulted in valuation-related disputes for genuine start-ups raising capital. While several exemptions were introduced over time, uncertainty persisted. Its removal signals a decisive shift towards facilitating investment, improving ease of doing business and fostering a more vibrant start-up ecosystem

Capital gains rationalisation

A welcome step has been the simplification of India's capital gains framework. By reducing complexity around holding periods, tax rates and asset classifications, the revised regime is a simplified structure – a flat long-term capital gains rate and harmonised holding periods across listed and unlisted instruments. The revised regime gives investors greater visibility on exit outcomes and improves confidence in long term capital allocation,

Reduction in tax rate for foreign companies

To increase India’s global competitiveness and bring further parity with Indian domestic companies, the government has reduced the corporate tax rate applicable to foreign companies from 40 per cent to 35 per cent. The move is particularly significant for multinational companies that often enter India through branches or project offices before establishing wholly owned subsidiaries. By narrowing a long-standing tax differential, India is lowering a structural barrier seen as disincentive to operating in India without local incorporation

APA framework overhaul

A stronger and more time-bound Advance Pricing Agreement (APA) programme can provide multinational businesses with greater certainty on their transfer pricing positions, reducing the risk of lengthy tax disputes.

The government's safe harbour regime currently catering to auto sector could be expanded to cover a wider range of manufacturing activities such as electronics, semiconductors, engineering, chemicals and other manufacturing segments which could significantly simplify tax compliance and reduce disputes

Removal of the angel tax Capital gains rationalisation Reduction in tax rate for foreign companies APA framework overhaul

Removal of the angel tax

Capital gains rationalisation

Reduction in tax rate for foreign companies

APA framework overhaul

Other incidental direct tax incentives:

Employee-intensive businesses and fast-growing organisations may derive significant tax benefits under Section 146 of the Act. The provision allows an additional deduction of 30 per cent of eligible employee costs for three consecutive assessment years, over and above the normal deduction of salary expenditure

Expenditure on scientific research – Section 45 of the Act permits a deduction for capital expenditure incurred on scientific research related to the taxpayer's business, excluding expenditure on land. This deduction is relevant for advanced manufacturing businesses, industrial automation, EV ecosystem players and R&D-led enterprises establishing design and innovation centres in India

Tax exemption to start ups - DPIIT-recognised start-ups with turnover below INR300 crore and engaged in innovation-driven businesses may claim a 100 per cent deduction of eligible profits for any three consecutive tax years out of the first ten years from incorporation. The provision can materially improve cash flows for technology, AI, fintech, deep-tech and other new-age businesses during their growth stage

ii. Indirect tax

GST, Customs and the tax framework as enablers

The GST reforms recommended by the GST Council in September 2025 simplified the rate structure around two main slabs of 5 per cent and 18 per cent, with a separate 40 per cent rate for a few de-merit and luxury goods, and exemptions for essentials.^xv Inverted duty structures in man-made textiles and fertiliser inputs were corrected, and auto components were brought to a uniform 18 per cent rate. Compliance is also simpler: eligible businesses can obtain GST registration within three working days, and 90 per cent of refund claims for exporters and inverted duty cases can be released provisionally on a risk-assessed basis.^xviThe GST Appellate Tribunal is also now operational, giving businesses a dedicated forum for disputes. For a manufacturer, these measures mean less working capital blocked in refunds, more consistent rates across the value chain and a more efficient national market.

Customs reforms are moving the same way. The 2025-26 Budget reduced the number of industrial tariff rates to eight, set a two-year time limit for finalising provisional assessments and allowed importers to voluntarily correct declarations after clearance.^xvii The 2026-27 Budget extended the duty-deferral window for accredited operators and eligible manufacturer-importers to 30 days, lengthened the validity of Customs advance rulings to five years and committed to a single digital window for cargo clearance.^xviii

Under the bonded manufacturing scheme (MOOWR), duty on imported inputs and capital goods is deferred without interest and with no export obligation: it is not payable on goods that are exported and becomes payable only when finished goods are cleared into the domestic market.^xix Trade agreements also matter, and their status differs. The India-UK trade agreement entered into force on 15 July 2026^xx;negotiations with the EU concluded in January 2026 and the agreement awaits signature; and a framework for an interim agreement with the United States was announced in February 2026, with negotiations continuing^xxiThere remains a balance to strike between tariff support for domestic capacity and predictable access to imported inputs for manufacturers in global value chains.

C. Regulatory relaxations

Import – Export regulations

Recognising evolving global trade dynamics, the RBI has undertaken a significant overhaul of the export and import regulatory framework under FEMA which are effective from 01 October 2026, The key notable changes are liberalised framework for write off of export receivables, allowing set off of export receivables against import payables, permitting third payment and receipts. The new regulations place greater responsibility on AD banks to maintain robust, well-documented internal policies and SOPs covering all export, import, and Merchant trading transactions
ECB relaxations

The new ECB regulations mark a major overhaul, expanding eligibility, broadening the recognised lender base, easing borrowing limits, liberalising cost, and end‑use conditions, and overhauling the compliance and reporting framework. These regulations aim to enhance access to global debt markets while improving regulatory clarity and reducing compliance friction
The draft foreign investment rules, 2026

The NDI Rules organised foreign investment around 8 Schedules. The Draft FI Rules propose to significantly simplify the structure and replace the Schedule based model with only three annexures. The move is significant from an investor perspective as it makes the foreign investment regime easier to navigate, administer and interpret. The proposed changes are consistent with the Government's broader objective of reducing regulatory complexity and improving the overall ease of doing business in India

Where the next capital is likely to go

Electronics and semiconductors remain the anchor, with the opportunity shifting from device assembly to components, equipment, materials and design. In automotive and electric mobility, support now favours advanced technology and battery cells, extending into critical minerals and rare-earth magnets. Renewable energy equipment and green hydrogen benefit from the clean-technology emphasis, defence and aerospace draw on indigenisation mandates, and biopharma is being steered towards biologics. Data centres and global capability centres (GCC) are not manufacturing, but they anchor an adjacent digital, engineering and R&D base that feeds design and process capability in the plants themselves.

What investors should weigh

Incentives should shape location economics but rarely justify an investment on their own; suppliers, customers, logistics, utilities, talent and room to expand carry equal weight. As the framework matures, investors will place growing emphasis on certainty of implementation, timely realisation of approved benefits, coordination between Central and State authorities and stability in localisation requirements. Greater simplicity in the treatment of multi-party supply arrangements, including bill-to/ship-to flows, job work and consignment models, could help India capture more contract and toll manufacturing, which the tax framework has begun to address. The next phase may increasingly be defined by deeper component ecosystems, R&D intensity, skilled manufacturing talent, logistics cost and green manufacturing rather than assembly capacity alone.

Concluding thoughts

The reforms of the last few years indicate a conscious attempt to align incentives, tax policy framework, industrial strategy and digital infrastructure development around a common objective: making India not merely a market to access, but a platform from which to build.

In many ways, these initiatives represent the economic architecture of India's Amrit Kaal journey towards Viksit Bharat 2047. The common thread running through them is not simply the pursuit of growth, but the creation of an ecosystem capable of attracting long-term capital, nurturing technology, strengthening industrial capability and integrating India more deeply into global value chains. These reforms should help India reach towards its ambitious target of raising share of manufacturing to 25 per cent of GDP by 2035 as per national manufacturing mission announced in last year’s budget.

^[i] Ministry of Statistics & Programme Implementation, Press Note: Provisional Estimates of Annual GDP for 2025-26 (5 June 2026), mospi.gov.in.

^[ii]PIB, Ministry of Commerce & Industry, "10 Years of Make in India" (25 September 2024), Press Note 153203.

^[iii] PIB, "PLI Scheme: Powering India's Industrial Renaissance" (August 2025), Press Note 155082 – PLI first launched April 2020 in line with the Atmanirbhar Bharat vision.

^[iv] PIB, Ministry of Finance, "Union Budget FY 2026-27: Manufacturing Sector Driving India's Next Growth Phase" (February 2026), Press Note 157304 – Inter-Ministerial Committee formed for the National Manufacturing Mission.

^[v] PIB, "Highlights of Union Budget 2026-27" (1 February 2026), Release ID 2221455.

^[vi] PIB, Ministry of Heavy Industries, "Meeting of Consultative Committee of Ministry of Heavy Industries" (25 March 2026), Release ID 2244900

^[vii] PIB, Ministry of Commerce & Industry, "PLI Schemes Attract Over ₹2.40 Lakh Crore Investment, Generate More Than 14.15 Lakh Jobs", written reply in Lok Sabha (21 July 2026), Release ID 2287008.

^[viii] PIB, Ministry of Commerce & Industry, "Production Linked Incentive Scheme with ₹1.91 Lakh Crore Outlay Drives Strong Industry Participation Across 14 Strategic Sectors" (20 February 2026), Release ID 2230621 – "₹28,748 crore disbursed as on 31 December 2025".

^[ix] PIB, Ministry of Electronics & IT, "ECMS Accelerates Electronics Manufacturing: 38 Plants Operational, 16 in Advanced Construction Stages" (17 August 2026), Release ID 2300625.

^[x] PIB, Ministry of Electronics & IT, "Cabinet approves Semicon 2.0" (15 July 2026), Release ID 2284784 – also records twelve approved units under the first phase and three in commercial production.

^[xi] Dixon Technologies Annual Report

^[xii] Dixon Technologies Annual Report

^[xiii] KPMG in India data center opportunity (July 2026 edition)

^[xiv] Axis Capital Industry Analysis on India's Data Centre Capacity Outlook

^[xv] PIB, Ministry of Finance, "Recommendations of the 56th Meeting of the GST Council" (3 September 2025), Release ID 2163555 – rate structure, inverted duty corrections, uniform 18 per cent on auto parts, and operationalisation of the GST Appellate Tribunal.

^[xvi] CBIC, Notification No. 18/2025-Central Tax (31 October 2025), Rules 9A and 14A, CGST Rules, 2017; CBIC Instruction No. 06/2025-GST (3 October 2025), risk-based provisional sanction of 90 per cent of refund claims; cbic.gov.in.

^[xvii] PIB, Ministry of Finance, "Union Budget 2025-26 proposes to remove seven customs tariff rates for industrial goods" (1 February 2025), Release ID 2098364.

^[xviii] Ministry of Finance, Union Budget 2026-27, Key Features of Budget 2026-27 (1 February 2026), indiabudget.gov.in.

^[xix] Customs Act, 1962, section 65; CBIC, Manufacture and Other Operations in Warehouse Regulations, 2019 (Notification No. 69/2019-Customs (N.T.), 1 October 2019) and Circular No. 34/2019-Customs, cbic.gov.in.

^[xx] PIB, Ministry of Commerce & Industry, India–UK Comprehensive Economic and Trade Agreement to enter into force on 15 July 2026 (17 June 2026), Release ID 2274280.

^[xxi] PIB, Ministry of Commerce & Industry, "Factsheet: India and European Union Trade Agreement" (27 January 2026), Release ID 2219146; PIB, "India's achievements in Free Trade Agreements for the year 2025-26" (March 2026), Release ID 2236134 – framework for an interim agreement with the United States announced 7 February 2026.