India is likely to renegotiate its bilateral tax treaties once global bodies such as the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN) finalise a framework for taxing artificial intelligence (AI)-enabled services, as AI businesses increasingly generate significant economic activity in a jurisdiction without a corresponding physical workforce.
Officials told TNIE that India is currently in a wait-and-watch mode. Once an international framework is finalised, there could gradually be changes in the way cross-border tax liabilities arising from AI-enabled services are assessed. However, the issue remains at a nascent stage, with countries awaiting detailed guidelines from the OECD and UN.
India's international tax rules and tax treaties have traditionally relied on concepts such as permanent establishment, physical presence and human intervention to determine whether income generated by a foreign enterprise can be taxed in India. AI-powered systems, however, could challenge these assumptions, officials said.
For instance, a foreign company could deploy AI-based developers, software agents or autonomous systems to perform functions for an Indian subsidiary without sending employees to India. Similarly, AI-powered robots could be deployed in India by foreign companies for installation, supervision, maintenance or other functions.
The question, therefore, is whether such virtual or technology-enabled presence could, under certain circumstances, create a taxable nexus in India. The issue could become more complicated as AI-powered systems begin performing increasingly sophisticated functions, officials said.
“What is being done on the UN model is basically related to the taxability of services, which are presently not covered under the existing clauses. The scope has to include AI-enabled services, which presently fall outside the jurisdictional ambit and may not end up being taxed in India. In that perspective, work will have to be done at the multilateral or bilateral level to renegotiate treaties and come up with solutions for AI-enabled taxation,” an official said.
With a new tax framework for AI-related services, existing international tax rules may require an overhaul, officials said. Guidelines may be needed on issues such as tax residency, permanent establishment, fees for technical services, deductibility of expenses and the treatment of tax positions generated with the help of AI.
Meanwhile, tax experts said the use of AI by both taxpayers and tax authorities could also result in more sophisticated tax disputes.
With access to large volumes of tax and transaction data, AI systems could identify patterns, inconsistencies and transactions that may not be visible through conventional assessments. This could help tax authorities improve compliance and target investigations, while also raising new questions over how AI-generated findings should be interpreted and challenged by taxpayers.