The Digital Tax Dilemma
A major point of contention has been India's approach to taxing global technology giants. To ensure foreign digital companies contribute to the Indian exchequer, the government had introduced an 'equalisation levy'. This was a tax on the revenue generated
by non-resident digital firms from the Indian market. From the US perspective, this levy unfairly targeted American tech companies like Google, Meta, and Amazon. The US government has historically viewed such unilateral digital services taxes (DSTs) as discriminatory and has threatened retaliatory trade measures against countries that implement them. While some reports earlier in 2026 suggested India had agreed to scrap the levy as part of a broader trade framework, the underlying philosophical divide on how to tax the digital economy remains a sensitive issue in the final negotiations.
The Battle Over Data's Borders
The second major roadblock is data sovereignty. India has been firming up its stance on data localization, which refers to rules requiring companies to store certain types of data within India's geographical boundaries. This policy is driven by India's concerns for the privacy of its citizens' data, national security, and law enforcement access. The recently enacted Digital Personal Data Protection (DPDP) Act, 2023, is the cornerstone of this framework, creating a comprehensive legal structure for how data is handled. US officials and tech companies argue that these requirements act as a significant barrier to trade. They contend that forcing data to be stored locally increases operational costs, particularly for smaller firms, and hinders the free flow of information that is crucial for the digital economy to thrive.
A Clash Within a Broader Framework
These disagreements are also playing out within the larger context of the Indo-Pacific Economic Framework for Prosperity (IPEF), a US-led initiative involving 14 countries. Notably, India has opted to stay out of the 'Trade' pillar of the IPEF, citing concerns that potential commitments on digital trade, labour, and environmental standards might not be in its best interest as a developing economy. This decision highlights the very same anxieties that are complicating the bilateral trade deal: a hesitation to commit to binding international rules on digital trade and data governance before its own domestic laws and policies are fully settled. The US, on the other hand, sees common high standards on digital trade as a key objective of the IPEF.
What's at Stake for Both Nations?
The delay is frustrating for businesses on both sides. An agreement is expected to provide a significant boost to bilateral trade, which has seen immense growth. For India, a deal would secure preferential access to its largest export market and potentially attract more American investment. For the US, it offers an opportunity to sell more goods and services to one of the world's fastest-growing major economies and to create a strategic economic counterweight in the region. Recent statements from officials on both sides suggest they are 'pretty close' to a deal, with most issues seemingly resolved. However, the remaining sticking points related to the precise language on digital trade and other sensitive areas are proving difficult to overcome.
