Union Budget 2025: 10 key reforms tech sector needs for innovation and growth

As India prepares for the Union Budget 2025-26, the technology sector anticipates key policy reforms and fiscal incentives to drive innovation, investment, and ease of doing business. Below are 10 important areas for this sector which require attention.

2. Incentives for data centres, cloud computing and AI

A robust data centre infrastructure is essential for India’s Digital India vision. Introduction of tax holidays or concessional tax rates (such as 15 per cent) for data centres, similar to past incentives for the software industry, will be helpful for the sector. Expanding the Production-Linked Incentive (PLI) scheme to include data centre hardware, cloud computing and AI enterprises would additionally attract foreign investment and bolster India’s position as a global digital hub.

3. Expanding R&D and AI investments

Artificial intelligence, blockchain, and quantum computing are driving the next digital revolution. The upcoming budget is expected to introduce targeted R&D tax incentives, grants for AI startups and public-sector investments in AI-driven governance. It is also anticipated that the proposed India AI Mission will support AI skilling programmes, cloud-based AI infrastructure and startup incubators.

4. Reforms for tech startups

To foster innovation, startups could significantly benefit from a single-window clearance for regulatory licenses and approvals, parity in long-term capital gains tax rates for listed and unlisted markets and capital gains tax exemptions for reinvestments. Additionally, clarity on overseas direct listing rules would provide startups with greater fundraising flexibility.

5. Tax reforms for ease of doing business

Simplified tax regulations also remain a top priority. Rationalisation of capital gains tax, clarification on withholding tax regimes, improved tax dispute management and harmonisation of Advance Pricing Agreements (APA) and Safe Harbour Rules – are all areas where some work and collaboration is required between industry and government, to reduce compliance burdens.

6. Skill Development

It is also a need of the hour to expand skilling initiatives under the Skill India Mission and focus on emerging technologies like AI, robotics, and cybersecurity to bridge skill gaps and meet workforce demands.

7. GST and TCS relief for E-commerce and digital payments

E-commerce platforms face cumbersome GST Tax Collected at Source (TCS) obligations, especially on zero-rated (export) supplies. Requiring exporters to pay GST TCS and later claim refunds creates cash flow challenges. Many industry participants have proposed eliminating GST TCS on exports to ease financial strain.

8. Strengthening Cybersecurity, Data Protection, and AI Ethics

With increasing digital transactions, cybersecurity investments are crucial. The technology sector anticipates dedicated budget allocations to enhance cybersecurity frameworks, promote safer digital transactions, and strengthen data privacy measures aligned with the Digital Personal Data Protection (DPDP) Act. Clearer guidelines on data privacy and cost-effective consent management frameworks through the highly anticipated rules will also enhance compliance.

Tax incentives for cybersecurity infrastructure, AI-driven fraud detection, and ethical AI practices would accelerate adoption and resilience. Encouraging responsible AI development through government initiatives could further position India as a leader in ethical AI deployment.

9. Incentives for electronics manufacturing

Expanding the PLI scheme to cover a broader range of electronic components would reduce import dependence and boost domestic manufacturing. In this regard, duty reductions on electronic components such to lower costs for domestic assembly units, will certainly help.

10. Tax Certainty for software, telecom and virtual digital assets

The tax treatment of software sales and telecom services by non-residents remains a contentious issue. Despite a Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt Ltd vs CIT, tax authorities continue to classify software payments as royalties. Clarifications in Budget 2025-26 would reduce litigation and provide certainty for global software businesses operating in India. Additionally, the taxation of Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs, remains an area of ambiguity. A well-defined tax structure, addressing aspects like capital gains treatment, GST applicability, and offset mechanisms for losses, would provide much-needed clarity and foster a more regulated digital asset ecosystem.

11. Encouraging green and sustainable tech

The budget presents an opportunity to align India’s technology growth with sustainability. Incentives for green data centres, tax breaks for energy-efficient cloud infrastructure, and increased funding for climate-tech innovations could position India as a leader in sustainable digital growth.

The Union Budget 2025-26 has the potential to be a game-changer for India’s technology sector. Addressing taxation complexities, fostering digital infrastructure, supporting AI and data-driven innovation, easing e-commerce compliance and strengthening cybersecurity can accelerate India’s transformation into a trillion-dollar digital economy.

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As a technology lawyer, I anticipate policy shifts that will enhance ease of doing business and create a robust legal framework for digital transactions, taxation, AI, and data governance. With the right fiscal and regulatory measures, India can position itself as a global leader in technology innovation, investment and entrepreneurship.

The author is Partner, IndusLaw. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.