The Union Budget 2026 gave a fillip to the growing data centre business in the country and proposed a tax holiday till 2047 for any foreign company that provides cloud services to customers globally by using data centre services from India.
“Recognising the need to enable critical infrastructure and boost investment in data centres, I propose to provide a tax holiday till 2047 to any foreign company that provides cloud services to customers globally by using data centre services from India. It will, however, need to provide services to Indian customers through an Indian reseller entity,” the finance minister said on Sunday as part of her speech.
A proposal has also been made to provide a safe harbour of 15 per cent on cost in case the company providing data centre services from India is a related entity.
Ashwini Vaishnaw, minister of electronics and information technology, in a press briefing post the Budget, said: “The work on the $70 billion investment that has been committed in India for the setting up of data centres has already begun. For now, the total investment announcement is $90 billion. The tax holiday till 2047 that has been announced today will help India be included among countries that have large AI data centre hubs.”
He further added that India already has the second most populous AI talent pool in the world and ranks third overall in AI. Today’s announcement around the simplification for IT services companies and data centres will also help India get ahead in providing AI services.
“The announcement is a strong signal aimed at accelerating capital inflow, early capacity creation, and faster enterprise cloud adoption at scale,” said Sunil Gupta, chief executive officer of Yotta Infrastructure.
While a tax holiday helps global players enter India quickly, large-scale and mission-critical operations gravitate towards Indian entities because predictability in taxation, compliance, and regulatory alignment matters more.
“As hyperscalers localise through Indian entities and expand their India footprint, demand for hyperscaler data centres combined with GPU-dense, AI-optimised infrastructure will rise sharply — areas where Indian operators with deep local execution capabilities, regulatory alignment, and energy-backed capacity are uniquely positioned,” added Gupta.
India’s data centre industry reached a major milestone in October when Google announced plans to set up a 1 gigawatt (GW) AI data centre in the port city of Visakhapatnam, Andhra Pradesh, investing $15 billion over the next five years.
Vaishnaw further said: “The incentives given to the nuclear power industry by waiving the basic customs duty will help data centres, as energy is an important input for running large data centres. Energy is also an important layer of the AI architecture. Nuclear power will provide the base load clean power that is required for the long-term sustenance of the AI economy.”
Impetus for GCCs: Safe harbour threshold raised
In another critical and long-awaited move intended to benefit the information technology sector, especially global capability centres (GCCs), the government has raised the threshold for availing safe harbour for IT services to Rs 2,000 crore from Rs 300 crore.
The finance minister also clubbed software development services, IT-enabled services, knowledge process outsourcing services, and contract R&D services into “information technology services”, with a common safe harbour margin of 15.5 per cent for all.
“This is a far more simplified way of approaching the GCC tax controversy issue,” said Ritika Loganey Gupta, partner and GCC sector tax leader at EY India, referring to the clubbing of the sector and the fixing of the safe harbour margin.
GCCs, till now, based on their operations, were taxed at different percentages. So, one enterprise could have a transfer pricing margin of 18 per cent if it was engaged in software development, while another engaged in R&D activities could see margins as high as 24 per cent. However, the controversy arose when there was a difference of opinion on the nature of the activity between enterprises and tax authorities, leading to numerous litigations. This created uncertainty around the expansion plans of one of India’s fastest-growing sectors.
“This is something the industry has been seeking for the past few years, working closely with the government. Now, I think the government has taken a significant step forward by providing a more comprehensive framework. Many more GCCs will be able to participate in the safe harbour regime, not only because the threshold has been significantly increased, but also because the framework has been simplified. The government has collapsed multiple categories into one and set a margin rate that is much closer to what the industry was expecting,” said Ashish Aggarwal, vice president, policy, at Nasscom.
For IT services companies that want to conclude advance pricing agreements (APAs), the government will fast-track the unilateral APA process for IT services and aims to conclude it within two years. The period can be extended by a further six months at the taxpayer’s request.
“If GCCs did not go with the safe harbour margin, they had to take the APA route, which involved tax authorities visiting the GCC location and even going to the company’s headquarters to understand operations, a process that took anywhere between three and five years. This meant that companies did not know how margins would work. With the recent proposals, the timeline has now been reduced, providing more certainty,” said EY’s Gupta.
Elements:
Total load capacity of 1.5–1.7 GW in 2025, expected to expand five-fold to 8 GW by 2030: Jefferies
Seventy per cent of current demand is being driven by hyperscalers such as Google, Amazon, and Microsoft
Mumbai and Chennai are the data centre hubs
India is likely to invest 0.4–0.9 per cent of its real GDP in grid expansion and storage over the next decade to meet the data centre boom, according to Moody’s