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Budget 2026: Tax proposals and opportunities in India data centers
Listen to our podcast about Budget 2026 tax proposals for India data centers, exploring the tax holiday till 2047, Safe Harbor margins, PE clarity and cloud investment opportunities.
In this episode on Budget 2026 series on EY India Insights, Vishal Malhotra, Tax Leader – Technology, Media & Entertainment and Telecom, EY India unpacks one of the most significant announcements—the long‑term tax holiday for data centers. He explains the implications of the policy on global cloud providers and domestic data center operators, which contribute to India’s ambition to emerge as an AI and cloud global hub. Vishal explains the impact of the new tax holiday, extending up to 2047, on resolving tax uncertainties around permanent establishment risks, cross‑border attribution, and the classification of payments between Indian entities and global majors. He adds that even without the tax benefit, India’s cost advantages are attractive and create opportunities for Indian companies.
He explains how the Safe Harbor margin of 15% for Indian resellers brings much‑needed clarity, enabling foreign cloud companies to confidently serve global customers from India while ensuring India rightfully taxes revenues earned domestically. Vishal also shares why India’s strong telecom backbone, undersea cable access, and cost efficiencies position the country as a compelling global hub for data center investments.
Key takeaways
Budget 2026 proposals extend tax holiday up to 2047 for foreign companies that use India data centers to serve their global customers.
Revenue of Indian entities operating data centers under the reseller model and serving Indian customers would be taxable in India.
A Safe Harbor provision of 15% on cost is proposed for Indian captive data center service providers.
The tax benefits are available under certain conditions and to specified companies/data centers. Clarifications on eligibility are awaited.
An opportunity exists for domestic players to operate and cater to global companies that propose to serve their global customers through India data centers but do not wish to make large investments.
Indian real estate companies and other large players can facilitate the entry of large data centers that do not want to invest in land, buildings, etc.
The Budget gives tax certainty, which is critical for foreign players committing huge investments into India. This certainty is going to propel India in the data center space and also promote it as a hub for AI.
Vishal Malhotra
Tax Leader – Technology, Media & Entertainment and Telecom, EY India
For your convenience, a full text transcript of this podcast is available on the link below:
Pallavi
Welcome to another post-Budget episode of the Budget Insights series on EY India Insights. In this episode, we explore the Union Budget announcement on the new tax holiday for data centers and what it means for foreign cloud providers, digital infrastructure players, and India’s ambitions in AI and cloud computing.
Vishal, to begin with, what exactly does the new tax holiday for data centers announced in the Union Budget mean? And how could it change the landscape for foreign cloud and data infrastructure companies operating in India?
Vishal Malhotra
Over the past few years or so, maybe over the last year or thereabouts, we have seen that foreign majors have been committing substantial investment to set up data centers in the country. And these data centers are being proposed in India, both to tap the domestic market and also to serve global customers, such that such data centers have the scale to meet the economics of such investments.
On the ground, there has been a challenge that the way the data centers operate, the foreign entities have a good visibility of what actions are being taken at the data center and of the various data center services, but its cloud computing sets or cloud storage services are provided through the data centers. This has given us tax risk in terms of whether operation of these data centers and serving of customers by foreign majors gives rise to any tax cost of operating such data centers in India. And we have seen on the ground that some of these larger players have faced tax litigation in India.
There have been litigation around whether the data centers are controlled, operated by the foreign players, whether this constitutes permanent establishment in India, and if it is a permanent establishment, what are the charges, what is the tax, or the attribution for such permanent establishment? And if Indian companies are resellers, what is the nature of the payment which the Indian company makes to the foreign player; whether it is fee for technical services or royalty?
There has been a lot of uncertainty around how the foreign companies would get taxed from the operations of the data centers in India. What the Budget proposals attempt to do is that they are extending a complete tax holiday up to 2047 for such foreign companies, who use these India data centers to serve their global customers.
What they have essentially said is that the foreign or the global customers can be served by the data centers in India but as far as the customers in India are concerned, such customers need to be served by the Indian entities, operating such data centers under the reseller model so that the companies make a reasonable margin for providing services to the customers in India, which are taxed in India. And India gets its fair share of taxes on such revenues.
They have proposed a 15% Safe Harbor, that if the Indian company earns cost plus 15% on the infrastructure cost, then that is a fair compensation to the Indian entity. And that is a fair amount which should be brought to tax in India. Where it helps the foreign companies is that now they can freely serve their global customers from India and they get a tax certainty that they will not get into any tax litigation. They can increase their investments. They can make India bids not just to serve Indian customers but also global customers.
India offers substantial advantages. We have a very strong telecom network. We have undersea cables landing up to the Indian coast, which makes these locations very attractive for global data center activities. So, I think it really changes the landscape.
It gives tax certainty, which is critical for foreign players because these data centers involve huge investments and if committing huge investments into India, they would like to be clear that of what the operating costs are, which is actually a very significant component of it. This certainty is really going to propel India in the data center space and also really promote India as a hub for AI.
Pallavi
Thank you. Vishal. Now, adding to the previous question, how might this long-term tax incentive extending up to 2047, help India position itself as a global hub for data centers and digital infrastructure, especially in the era of AI and cloud computing?
Vishal Malhotra
We have already seen that some of the global majors have committed substantial investments into India. We have Google committing US$15 billion. Microsoft has already talked about a US$20 billion investment, and they are already a reasonably large player in India. Then we have Amazon, with US$8.3 million. A number of private equity players, including Blackstone, etc., have all committed investments of US$60-70 billion cumulatively, in the data center space in India.
At times, due to these uncertainties, most of these investments do not really yield the true potential of the space. With the tax incentive coming in, and I think it is not actually an incentive but more a certainty around no tax in India and no litigation around how the data center activities are undertaken and how the customers are served from India. That is the crucial part here.
With that happening, these investments are certainly going to come to India. And depending on how the AI space grows in India and also globally, we would see that the current investments, if they are a success, the players will be able to achieve adequate capacity utilization.
I think we will see substantially more investments coming to India over the next 20 years.
Pallavi
Thank you, Vishal. What are the practical conditions and implications for companies such as the requirement to serve Indian customers through local entities? And how could this affect the domestic players and the broader tech ecosystem?
Vishal Malhotra
As I mentioned initially as well, one of the requirements they have really made is that as far as the domestic customers are concerned, those customers are served through Indian entities. And the objective really is that whatever incomes are earned or the margins which are attributable to provision of services to the Indian customers, part of it should certainly be taxed in India. So, India should also have a good play on that side as far as data center services to Indian customers is concerned. So the requirement there is then that all the contracts with the Indian customers need to be routed through the Indian entities, which could be an Indian subsidiary or even third-party players.
And the foreign company cannot directly earn revenue from the Indian customers. And also the Indian entities are required to retain a fair share of the margin, which will be transfer pricing driven by the government, really to ensure that those who do not want to get into any form of litigation, they have also got Safe Harbor provisions to say that if the Indian reseller entity, which is operating the India data center infrastructure, earns a 15% margin on the cost, then that will be a fair attribution of profits on serving domestic customers, between the foreign and the Indian counterparts. Where this happens, there is really no litigation around this aspect.
So, the requirement is Indian customers need to be served under the reseller arrangements by the Indian affiliates or Indian entities which are operating the data centers, and there should be a 15% margin earned by the Indian entity on those services. As long as these elements are concerned, the foreign companies would be eligible to have a complete tax holiday in India. As a group as well, they will have significant tax certainty in operating those data centers, both to service global customers and Indian customers.
The other part of the question which you have is how does it impact the domestic players and the broader technical ecosystem? As far as domestic data center players are concerned, they would also be gainers because some of the larger players like Microsoft or Google or even Amazon, they would set up their own data centers.
But the AI space is also huge and there are multiple players with a reasonable size operating globally. As far as those players are concerned, who do not wish to make their own investments to serve data centers, to take advantage of the cost efficiencies offered in India. They would really like to be working with the domestic players, which gives a pretty good space to domestic players to operate and serve global companies proposing to serve their global customers through India data centers.
One thing we will have to be a little cautious about is that while these tax holidays have been offered, there are certain conditions that the benefits will be available to specified companies and specified data centers.
We will need to really wait to see what clarifications come on those elements to make sure that the larger ecosystem is also going to be eligible for these exemptions or tax holidays and it is not just the large players who are able to get covered by these guidelines or the framework which will come out. That it is not going to be that only those players are governed by that.
We will have to wait and watch. But the intent of the government clearly appears to be to make India a large scale data center destination for the world. As far as the broader economy is concerned, whenever these data centers are set up, the foreign players are largely interested in investing in the equipment and the technology. They are not necessarily interested in investing in land, building and other paraphernalia around it. That itself gives a huge opportunity to domestic players to set up the basic infrastructure, which is critical for operation of these data centers. I think that will be a large opportunity for Indian real estate companies and other large players who have the financial muscle to invest in such infrastructure to facilitate the entry of large data centers into the country.
Pallavi
Thank you, Vishal. That brings us to the end of this episode. Thank you so much for joining us again and sharing the insights on the data center tax holiday and its implications on the technology ecosystem to all our listeners.
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