Key Takeways
- 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 recognizes that technologies like cloud computing, AI data centres, and advanced electronics are becoming key drivers of economic growth.
To attract global companies, the government has announced a tax holiday till 2047 for foreign cloud service providers that set up and operate data centres in India. This gives companies long-term financial certainty and encourages them to invest in India.
Around the world, data centres are becoming a major area of investment. According to UNCTAD, they made up more than 20% of global greenfield investments in 2025, with over USD 270 billion in planned projects. This shows how countries are competing to attract digital infrastructure, especially due to the rising demand for AI and data-driven services. In this situation, India’s policy aims to bring more investment into the country, strengthen its digital economy, and make it an important part of global digital supply chains, supporting the long-term goal of becoming a developed nation (Viksit Bharat by 2047).
Why This Policy Was Introduced?
Data centres and cloud infrastructure need very high initial investment and take a long time to become fully operational. Especially for AI-based data centres, companies have to spend heavily on advanced computing systems, electricity supply, cooling systems, and skilled workers.
As the global demand for AI computing power is increasing quickly, many countries are trying to attract these investments. In this situation, India’s decision to give a tax holiday till 2047 provides long-term certainty to companies. This makes India more attractive for global cloud providers and helps ensure that important digital infrastructure is built and located 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).
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 for data centres is part of a bigger plan in Budget 2026–27 to strengthen India’s overall technology and digital ecosystem. The government is working on different areas—from semiconductors and electronics to IT services and digital infrastructure.
India Semiconductor Mission (ISM) 2.0
The government has launched ISM 2.0 to build strong semiconductor capabilities in India. It focuses on:
- Making semiconductor equipment and materials in India
- Expanding the chip design ecosystem
- Developing skilled talent in this field
For this, ₹1,000 crore has been allocated in 2026–27. The goal is to support industries like data centres and advanced computing, which depend on semiconductors.
Electronics Components Manufacturing Scheme (ECMS)
The budget has increased funding for this scheme from ₹22,000 crore to ₹40,000 crore.
- It has already received 149 applications, showing strong industry interest
- The aim is to boost domestic production of electronic components and reduce dependence on imports
IT Services Reforms
India’s IT sector is a major export earner (over USD 220 billion). To support it, the government has proposed:
- Bringing different services (software, IT-enabled services, KPO, R&D) under one category: IT Services
- Setting a standard safe harbour margin of 15.5% for tax clarity
- Increasing the eligibility limit from ₹300 crore to ₹2,000 crore
- Introducing automated approvals to reduce delays
- Speeding up the Advance Pricing Agreement (APA) process
Overall: These steps aim to make India a strong, self-reliant, and globally competitive technology hub, supporting everything from chip manufacturing to IT services and digital infrastructure.
India’s Expanding Cloud and Digital Infrastructure Base
India’s cloud and data centre ecosystem is expanding in line with the country’s digital transformation and growing use of AI-enabled applications across sectors.
Under the Digital India initiative, the national cloud infrastructure GI Cloud (MeghRaj) has been established to meet government cloud requirements. MeghRaj provides secure, scalable, and elastic cloud facilities for delivery of e-Governance services through the National Informatics Centre (NIC). National Data Centres operate with layered security frameworks supported by empanelled providers meeting international security standards.
Industry estimates indicate that India’s cloud data centre capacity has reached around 1,280 MW and is projected to grow four to five times by 2030, reflecting rising demand for digital and AI infrastructure.
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 the world, governments are actively supporting the growth of AI data centres and digital infrastructure because they are now seen as essential for economic and technological development.
In the United States, a Presidential order has been issued to speed up the building of large AI data centres. It focuses on:
- Faster approvals and permissions for projects
- Allowing the use of government-owned land
- Supporting related infrastructure like energy systems, semiconductors, networking, and storage
- Providing financial help through loans, grants, tax benefits, and agreements
These projects are very large in scale—some require over 100 megawatts of power, showing how massive AI infrastructure has become.
In China, companies are also rapidly expanding their AI and cloud infrastructure. They are investing heavily in:
- Data centres
- AI chips
- Hardware supply chains
- Even setting up data centres in other countries
This shows that countries see digital infrastructure as the foundation for AI growth and future technologies.
In this global competition, India’s policy of offering a long-term tax holiday for data centres gives companies confidence and stability to invest. It helps India attract big investments, build its own digital infrastructure, and become an important player in the global digital economy.
Conclusion
The tax holiday announced in the Union Budget 2026–27 gives long-term policy stability to global companies investing in cloud services and AI data centres in India, with benefits extending till 2047. Since building data centres requires huge investments and takes time, this kind of long-term clarity helps companies plan confidently and commit resources. At the same time, the policy includes proper safeguards by setting clear eligibility conditions and ensuring that regular domestic business activities remain taxable, maintaining a balanced approach.
This move is also part of a broader and well-coordinated strategy that includes reforms in semiconductors, electronics manufacturing, and IT services, all aimed at strengthening India’s digital ecosystem. With global competition increasing to attract AI infrastructure, India’s policy sends a strong signal that it is a reliable and future-ready destination for such investments. Overall, it helps position India as a key player in the global digital economy while supporting long-term growth and technological advancement.
