Why the Tax Holiday Matters
Data centres and AI computing facilities require massive capital investment and long project cycles. With global AI demand surging, nations are racing to secure infrastructure investments worth billions of dollars.
Under the new provision, income earned by notified foreign cloud providers from global operations routed through India-based data centres will be exempt from Indian taxation until Tax Year 2046–47, subject to strict eligibility conditions.
The measure provides long-term policy certainty, which industry experts say is critical for capital-intensive digital infrastructure projects.
Defined Eligibility Framework
The exemption applies only to foreign companies that are formally notified under relevant provisions. These companies must procure data centre services from Indian entities operating notified facilities approved by the Ministry of Electronics and Information Technology (MeitY).
Services offered to Indian customers must be routed through an Indian reseller entity. This ensures that domestic transactions remain taxable under existing laws.
Where the Indian data centre operates as a related entity of the foreign provider, a 15 percent safe harbour margin on cost has been proposed under Income Tax rules. This simplifies transfer pricing compliance and reduces litigation risks.
Domestic Operations Remain Taxable
Importantly, profits generated within India continue to fall under standard tax provisions. Income earned by Indian data centre companies and reseller entities remains fully taxable.
The government has also proposed grouping software development, IT-enabled services, KPO, and contract R&D services under a unified Information Technology Services category with a 15.5 percent safe harbour margin. The threshold for availing safe harbour has been increased to ₹2,000 crore.
Semiconductor and Electronics Push
The tax holiday forms part of a broader digital ecosystem strategy. Budget 2026–27 announces the launch of India Semiconductor Mission 2.0 with a ₹1,000 crore allocation to expand semiconductor equipment design, materials manufacturing, and talent development.
The Electronics Components Manufacturing Scheme allocation has also been raised to ₹40,000 crore, reinforcing India’s ambition to strengthen domestic electronics production.
India’s Growing Digital Infrastructure Base
India’s cloud ecosystem is expanding rapidly under initiatives like Digital India and GI Cloud (MeghRaj). Industry estimates suggest current cloud data centre capacity stands at around 1,280 MW and could grow four to five times by 2030.
Nearly USD 70 billion in investments are already underway in India’s data centre sector, with additional projects announced. The long-term tax framework provides visibility for these capital commitments.
Global Competition Intensifies
Globally, AI data centre development is accelerating. According to international industry research, large-scale projects exceeding 100 MW capacity are becoming standard benchmarks for AI infrastructure planning.
With global investment competition intensifying, India’s 2047 tax certainty window positions it as a credible long-term destination for cloud and AI infrastructure.
Strategic Outlook
The Budget 2026–27 measure aligns with India’s broader Viksit Bharat 2047 vision. By combining tax incentives with semiconductor expansion and IT reforms, the government aims to strengthen both digital infrastructure and manufacturing capabilities.
While the exemption supports global investment flows, safeguards ensure domestic economic activity remains within the tax net. In a rapidly evolving AI-driven world, India’s policy clarity could prove decisive in shaping its digital future.
