Opinion Can tax holiday make India a cloud hub? Large data centres need more
Complementary reforms matter. Modernising transmission and distribution networks, improving grid stability, and enabling dedicated power corridors for energy-intensive facilities will influence how cloud providers evaluate Indian locations
Data centres sit at the core of the modern digital economy, powering everything from government platforms and financial transactions to AI training, content streaming, and enterprise Software as a Service (SaaS). (Image: Pixabay) The Union Budget 2026-27 makes one of the most far-reaching moves we have seen so far to attract global cloud players to build and run their infrastructure from India. At the centre of this push is a 21-year tax holiday, available until 2047, for foreign companies that provide global cloud services using data centre infrastructure located in the country. In simple terms, if a foreign cloud provider runs its global workloads from Indian data centres, its income from those operations can be exempt from income tax for more than two decades, subject to conditions.
Data centres sit at the core of the modern digital economy, powering everything from government platforms and financial transactions to AI training, content streaming, and enterprise Software as a Service (SaaS). Their capital intensity, high energy use, and deep integration with network infrastructure create natural economies of scale, which, over time, have led to high market concentration and significant entry barriers for new players. This is why policy choices on where data centres are located, who owns them, and under what conditions they operate have increasingly become questions of economic resilience and national security rather than just commercial decisions.
There are a few important points to note here. First, cloud providers are required to route their business in India through a domestic reseller entity. This creates a more predictable tax presence in India, rather than leaving everything to case-by-case interpretation.
Second, by tying the exemption to long-term operations through Indian data centres, the government is signalling that it wants anchoring of physical infrastructure and related jobs. In a market where a small number of hyperscalers already dominate global cloud share and benefit from massive installed bases, these conditions are also an attempt to use India’s demand as leverage to secure local footprints, thereby reducing vulnerability to unilateral policy shifts or geopolitical shocks elsewhere.
Alongside the headline tax holiday, the Budget also tackles a longstanding friction point with respect to transfer pricing disputes. When one group company sells services to another in a different country in the tech sector, tax officials and companies have often been caught in disagreements over what a fair profit margin should be. To dial down this uncertainty, the Budget introduces Safe Harbour provisions for data centre and IT services. A Safe Harbour is essentially a predefined profit margin. If a company chooses to adopt that margin, the tax authorities generally accept it without going into detailed audits and benchmarking each year.
For related-party data centre services linked to foreign cloud operations, the Safe Harbour is set at a 15 per cent mark-up on cost. This sits alongside a broader move to club software development, IT-enabled services, knowledge-process outsourcing, and contract R&D under a single “Information Technology Services” category with a 15.5 per cent margin. The idea here is to simplify a messy landscape of differing benchmarks and reduce the number of disputes that end up in litigation.
For multinational cloud providers, knowing that a 15 per cent mark-up will be accepted can make it easier to design internal pricing and allocate functions to India without constantly worrying about ex post facto adjustments.
The Budget goes a step further by extending similar treatment to component warehousing. Non-resident firms are allowed to store critical server and network components in bonded warehouses in India at a fixed profit margin of 2 per cent on the invoice value. This works out to an effective tax rate of around 0.7 per cent, as per the Budget. For companies managing global fleets of servers, keeping spares close to large deployment regions is essential for uptime and service reliability. Lowering the tax cost of such warehousing relative to other regional hubs eases logistics and maintenance for cloud infrastructure in India.
The tax holiday, Safe Harbour margins for data centre services, and incentives for component warehousing altogether form a policy that is broader than the IndiaAI compute pillar, which effectively subsidises demand for specific AI and research use-cases. In contrast, the Budget’s tax package is designed to shape supply-side decisions by global cloud firms across the board, regardless of whether the end-use is AI training, fintech, manufacturing, or entertainment. It seeks to create a base of globally integrated data centres in India, on top of which multiple sectors can build.
However, tax policy alone cannot determine whether India becomes a serious global cloud hub. The overall impact of these measures will depend heavily on how they interact with the country’s physical and regulatory infrastructure.
Large data centres need reliable, high-quality power at competitive tariffs, with clear rules on outages. They need strong network connectivity, including multiple fibre routes and peering arrangements. They also require land that is both available and suitable for such facilities, with predictable timelines for clearances.
This is where complementary reforms matter. Modernising transmission and distribution networks, improving grid stability, and enabling dedicated power corridors for energy-intensive facilities will influence how cloud providers evaluate Indian locations. Streamlining land acquisition and local approvals, while maintaining environmental safeguards, will affect project timelines and costs. Urban planning decisions around zoning and building norms will also shape whether data centre clusters can emerge and scale.
Investors will weigh the long-term tax holiday and Safe Harbour certainty against these on-ground constraints. A low effective tax rate is attractive, but interruptions in power, delays in approvals, or uncertainty around local regulations can offset some of that advantage. In practice, global firms would compare operating costs, reliability, talent availability, and regulatory risk in addition to taxes. The Budget’s tax measures strengthen one leg of that comparison. The rest will depend on how quickly the broader infrastructure and regulatory ecosystem can align with the ambition of turning India into a major global node for cloud and data infrastructure.
For now, the 2026-27 Budget lays out a clear invitation to global cloud companies. Whether this translates into a wave of new investments will be visible over the next few years, as firms update their regional strategies and decide where to build their next data centres.
The writer is assistant programme manager, GCPP (Technology and Policy), The Takshashila Institution
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