The 30-year-old visitor said she had flagged down the driver’s cab on Wednesday in Manali, a resort town in the Himalayan foothills popular with foreign travellers, to travel to a neighbouring town.
She was instead taken to an isolated location in a nearby forest and sexually assaulted in the driver’s car, police said.
“She said she surrendered to him after the driver told her (that) if she resisted the rape attempt, he would call his friends to gang-rape her,” regional police chief Shalini Agnihotri told media.
The woman filed a complaint with police after she was dropped at a nearby town by the accused, Agnihotri said, adding that a medical test confirmed she had been raped.
The driver, a Manali resident, was arrested by police on Friday based on the description given by the woman, who confirmed his identity after he was taken into custody.
India has a grim record of sexual violence, with nearly 40,000 rape cases reported countrywide in 2016.
Campaigners say the true figure is likely to be much higher given the social stigma around victims of sexual crimes.
Several foreign tourists have been sexually assaulted in Manali in recent years.
A 25-year-old Israeli woman was hospitalised in 2016 after she was raped by two men in the town, while in 2013 an American woman was raped by three men after accepting a ride in their truck.