6. Digital and Tech Sovereignty: Budget 2026-27’s AI and Semiconductor Roadmap

The Union Budget 2026-27 establishes a visionary framework to transform India into a global hub for Artificial Intelligence (AI) and high-end electronics. By providing long-term fiscal certainty and launching the next phase of the Semiconductor Mission, the government aims to capture the infrastructure layer of the global digital economy. • Strategic Tax Holiday for Data Centres: To attract an estimated USD 160 billion in cloud and AI infrastructure, the budget proposes a tax holiday until 2047 for foreign companies providing global cloud services via India-based data centres. This move seeks to make India the \'Data Capital\' of the world, rivaling established hubs like Singapore and Dublin. • Launch of Semiconductor Mission (ISM) 2.0: Building on the success of ISM 1.0, the second phase focuses on upstream high-value activities. Key pillars include the domestic manufacturing of semiconductor equipment, specialized chemicals/materials, and a robust chip-design ecosystem, supported by an initial provision of ₹1,000 crore. • Massive Boost to Component Manufacturing: The allocation for the Electronics Components Manufacturing Scheme (ECMS) has been nearly doubled from ₹22,000 crore to ₹40,000 crore. This addresses the \'disability\' in Indian electronics by incentivizing the production of sub-assemblies and parts, moving beyond just final assembly. • Simplification of IT Service Taxation: To support India’s USD 220 billion IT export sector, all IT/ITeS services are now grouped under a single category. The \'safe harbour\' threshold has been dramatically increased from ₹300 crore to ₹2,000 crore with a competitive 15.5% margin, reducing litigation and providing \'Ease of Doing Business.\' • AI Infrastructure and Related-Party Norms: For data centre service providers in India that are related entities to global firms, a safe harbour of 15% on cost has been proposed. This provides tax certainty for Global Capability Centres (GCCs) and prevents transfer pricing disputes. • Talent and Research Integration: The budget emphasizes a \'Design-Led\' manufacturing approach, integrating talent development with the semiconductor and AI hardware ecosystem to ensure that India provides both the \'brains\' and the \'brawn\' of the tech world. Key Definitions• Safe Harbour: A legal provision to reduce or eliminate liability or tax disputes as long as certain conditions (like a specific profit margin) are met. • India Semiconductor Mission (ISM): A specialized business division within the Digital India Corporation that aims to build a vibrant semiconductor and display ecosystem in India. • Data Centre: A centralized physical facility that houses critical applications and data, consisting of a network of computing and storage resources. • Advance Pricing Agreement (APA): A formal agreement between a taxpayer and the tax authority that determines the transfer pricing methodology for future international transactions. Constitutional and Legal Provisions • Article 246 (Union List): Items like \'Communication,\' \'Information Technology,\' and \'Major Industries\' fall under the Union\'s jurisdiction to ensure uniform national policy. • Income Tax Act, 1961 (Section 92CB): Provides the statutory power to frame Safe Harbour Rules to simplify transfer pricing for MNCs. • Digital Personal Data Protection (DPDP) Act, 2023: Acts as the regulatory pillar for the data centres being incentivized, ensuring data processed in India adheres to privacy standards. • National Policy on Electronics (NPE) 2019: The overarching policy framework that drives schemes like PLI and ECMS to promote domestic electronic value addition. Additional Keypoints for Analysis • USD 70 Billion Investment: The Minister highlighted that massive investments are already in the pipeline, indicating that global players like NVIDIA, AWS, and Google view the 2047 tax holiday as a \'generational opportunity.\' • Equipment and Materials: Unlike ISM 1.0 which focused on Fabs and ATMP, ISM 2.0 targets the \'pick and shovel\' of the industry—the specialized machinery and high-purity chemicals required for chip making. • Automated Rule-Based Process: By shifting safe harbour approvals to an automated system, the government is removing bureaucratic discretion, a key demand of the Silicon Valley investors. Conclusion The Budget 2026-27 signifies a shift from \'Incentive-based\' growth to \'Certainty-based\' growth. By locking in tax norms until 2047, India is signaling to global tech giants that its digital policy is immune to short-term political cycles. This strategy not only secures India’s place in the global AI supply chain but also ensures longterm high-tech employment for its burgeoning youth population. UPSC Relevance • GS Paper III: Science and Technology- developments and their applications and effects in everyday life; IT, Space, Computers, Robotics, Nanotechnology, Biotechnology. • GS Paper III: Indian Economy and issues relating to planning, mobilization of resources, growth, and development. • Prelims: Components of ISM 2.0; Meaning of Safe Harbour and APA; difference between ITeS and KPO categories under new budget rules.