Context
- Tax holiday till 2047 proposed for eligible foreign cloud providers using India-based data centres for global operations
- Structured eligibility framework, including notified entities, use of Indian data centres, and Indian reseller requirement for domestic services
- Domestic transactions continue under existing tax provisions, with a proposed 15% safe harbour margin for related data centre entities
- Part of a broader digital and semiconductor ecosystem push under Budget 2026–27 to position India as a global cloud and AI infrastructure hub
Introduction
The Union Budget 2026–27 has introduced an important policy to make India a global centre for digital infrastructure. The government understands that technologies like cloud computing, AI data centres, and advanced electronics are becoming essential for economic growth. To attract more investment in these areas, it has announced a tax holiday until 2047 for eligible foreign cloud service providers that operate through data centres located in India. Around the world, data centres are becoming a major source of investment and economic activity. According to the United Nations Conference on Trade and Development (UNCTAD), data centres made up over one-fifth of global greenfield investment projects in 2025, with announced investments crossing USD 270 billion. The growing demand for AI computing and data-heavy digital services is increasing competition among countries to attract such infrastructure.
In response, India’s long-term tax policy is designed to give investors confidence, encourage companies to build high-value digital infrastructure within the country, and strengthen India’s position in global digital supply chains. This move also supports the broader goal of transforming India into a developed nation (Viksit Bharat) by 2047.
Why This Policy Was Introduced?
Data centres and cloud infrastructure require high upfront capital investment, long gestation periods, and sustained policy certainty. AI-oriented data centres, in particular, involve significant expenditure on computing hardware, energy systems, cooling infrastructure, and skilled manpower.
With global demand for AI compute capacity rising rapidly, countries are competing to attract large-scale data centre investments. The tax holiday till 2047 is intended to provide long-term visibility and certainty, enabling India to attract global cloud service providers while anchoring critical digital infrastructure within the country.
Understanding the Tax Holiday Provision
The Budget proposes that a foreign company providing cloud services globally, while utilizing data centre services located in India, will be eligible for a tax holiday extending up to 2047.
Under this framework:
- Income of such foreign cloud service providers from global cloud operations routed through India-based data centres will not be subject to Indian taxation, subject to specified conditions.
- Services to Indian customers must be delivered through an Indian reseller entity, ensuring that domestic transactions remain within the tax net.
The exemption applies from Tax Year 2026–27 to Tax Year 2046–47, providing a stable, predictable tax environment for global cloud players investing in India’s data centre infrastructure.
Defined Eligibility Framework
The exemption is available to foreign companies providing cloud services under a structured framework. A foreign cloud service provider may avail the tax holiday where:
- The foreign company is notified under the relevant provisions.
- Data centre services are procured from an Indian company operating a data centre in India.
- The data centre facility is notified by the Ministry of Electronics and Information Technology (MeitY).
This framework establishes regulatory oversight and ensures that the incentive operates within defined policy parameters.
Tax Treatment of Domestic Operations
Under the proposed framework, profits arising from domestic economic activities will remain taxable as in the case of any other domestic company. These include:
- Data centre services provided to the global entity by the resident Indian data centre company; and
- Resale of cloud services to Indian customers by the resident Indian reseller entity.
Further, where the Indian data centre is a related entity of the foreign company (operating as a cost-plus centre), a safe harbour margin of 15 percent on cost has been proposed.
Linkage with Broader Technology Ecosystem Initiatives
The tax holiday is part of a wider set of measures announced in Budget 2026–27 to strengthen India’s technology sector and digital manufacturing ecosystem. These initiatives cover different stages of the technology value chain — from semiconductor design and raw materials to electronics components, IT services, and digital infrastructure.
India Semiconductor Mission (ISM) 2.0
The Budget has announced the launch of India Semiconductor Mission 2.0, which builds on earlier efforts to develop semiconductor manufacturing in the country. The programme focuses on:
- Designing and manufacturing semiconductor equipment within India
- Producing materials required for semiconductor manufacturing
- Expanding the semiconductor design ecosystem
- Strengthening skill development and talent training
An allocation of ₹1,000 crore has been made for ISM 2.0 in FY 2026–27. This initiative aims to build strong core electronics manufacturing capabilities that support digital infrastructure such as data centres and advanced computing systems.
Electronics Components Manufacturing Scheme (ECMS)
The Budget has increased funding for the Electronics Components Manufacturing Scheme from around ₹22,000 crore to ₹40,000 crore. The scheme has already received 149 applications, which is more than expected and shows strong interest from industry.
The higher allocation is meant to boost domestic production of electronics components and strengthen the overall electronics manufacturing ecosystem in India.
IT Services Simplification and Safe Harbour Provisions
IT services are one of India’s biggest export sectors, with exports exceeding USD 220 billion. To provide clarity in taxation and support industry growth, the Budget proposes:
- Bringing software development, IT-enabled services, knowledge process outsourcing, and contract R&D under one single category called Information Technology Services
- Setting a common safe harbour margin of 15.5%
- Raising the eligibility threshold for safe harbour from ₹300 crore to ₹2,000 crore
- Providing approvals through an automated, rule-based system
- Speeding up the Unilateral Advance Pricing Agreement (APA) process for IT services
These measures aim to simplify regulations, provide tax certainty, and support the continued growth of India’s IT sector.
India’s Expanding Cloud and Digital Infrastructure Base
India’s cloud and data centre sector is growing rapidly as the country continues its digital transformation and as more industries start using AI-based technologies and data-driven services.
As part of the Digital India programme, the government has created a national cloud system called GI Cloud (MeghRaj) to meet the cloud computing needs of government departments. MeghRaj offers secure, flexible, and scalable cloud services that help deliver e-Governance programmes through the National Informatics Centre (NIC). The country’s National Data Centres also operate with strong multi-layer security systems and work with approved providers that meet global security standards.
According to industry estimates, India’s cloud data centre capacity is currently about 1,280 megawatts (MW). This capacity is expected to increase four to five times by 2030, showing the rapidly rising demand for digital services and AI infrastructure in the country.
Expanding AI and Cloud Data Centre Infrastructure
Data centres, especially AI-focused facilities, form the backbone of modern digital infrastructure. Investments of nearly USD 70 billion are already underway in India’s data centre sector, with an additional USD 90 billion in announced projects, highlighting the scale of expansion.
The proposed tax framework extending to 2047 provides long-term policy visibility for such capital-intensive investments. The tax holiday for foreign cloud providers complements broader technology initiatives announced in Budget 2026–27, including India Semiconductor Mission 2.0 and enhanced allocation for the Electronics Components Manufacturing Scheme, complementing digital infrastructure expansion. Together, these measures strengthen both digital infrastructure and electronics manufacturing capacity.
Global Policy Momentum in AI Data Centre Infrastructure
Across major economies, AI data centres and related digital infrastructure are increasingly being supported through policies that enable large-scale deployment and long-term investment.
In the United States, a Presidential Executive Order titled “Accelerating Federal Permitting of Data Center Infrastructure” outlines steps to expedite the development of large AI data centre projects. The Order provides for:
- Faster regulatory and permitting processes
- Use of federally owned land to support data centre development
- Support for energy systems, semiconductors, networking equipment and data storage infrastructure linked to data centres
- Financial support mechanisms such as loans, grants, tax incentives and offtake agreements
The Order defines large-scale data centre projects as those requiring more than 100 megawatts of new load, indicating the scale at which AI infrastructure is being planned.
At the same time, Goldman Sachs Research notes that Chinese AI and cloud providers are entering a phase of accelerated infrastructure build-out. Chinese firms are projected to make substantial investments in data centres, alongside expansion in AI chips, hardware supply chains and overseas data centre capacity. The research indicates that infrastructure development is being treated as a foundational requirement for AI growth and digital services expansion.
These developments underscore the strategic centrality of AI and cloud data centre infrastructure within national technology and industrial strategies. In this context, India’s long-term tax framework for cloud services using India-based data centres provides policy clarity and investment visibility in a capital-intensive sector characterised by long project cycles and rapidly expanding demand.
Conclusion
The tax holiday announced in Budget 2026–27 gives global cloud and AI companies long-term policy clarity until 2047 if they invest in digital infrastructure in India. This helps companies feel more confident about investing in a sector that requires very high capital. At the same time, the policy still includes safeguards, such as clearly defined eligibility rules and continued taxation of domestic business activities.
This step is also in line with other reforms in semiconductors, electronics manufacturing, and the IT sector. Together, these measures show a coordinated effort to strengthen India’s overall digital ecosystem. At a time when countries around the world are competing to attract AI infrastructure, this policy helps position India as a reliable and long-term destination for cloud and data centre investments.
