The Economic Survey 2026 points out that while India generates 20% of global data, we host only 3% of the global data centres, thus leading to a growth opportunity and a competitiveness gap. One of the reforms that needs to be addressed in promoting investment into data centres and AI computing capacity is tax clarity.

Tax risks

From a tax point of view, a key bottleneck is lack of clarity on the taxability of foreign companies earning income by procuring services from an Indian data centre. More pertinently, the risk of attributing income to a foreign corporation and subjecting it to tax in India has been a deterrent in attracting huge investments in this sector.

Proposals

Budget 2026 introduces a tax holiday framework. Where a foreign company (FC) avails services from an Indian data centre and the FC in turn consumes such services in delivering services/ earning income in the overseas market, the tax laws clarify that such income will not be taxable in India. The exemption is granted from 1 April 2026 up until financial year ending 31 March 2047, in all for 22 years.

There are a few conditions that need to be met for claiming the tax holiday:

1. The FC ought to be notified by the central government. We will soon know the process to notify for the benefit;

Another area of tax uncertainty in this sector is around Transfer Pricing. Where the Indian entity which houses the data centre is a related party of the FC, it is likely determination of arm’s length price for the services will be an area of dispute between the tax authorities and the taxpayer. Indian tax disputes take time to resolve.

Hence, to overcome the uncertainty, safe harbour norms have been prescribed. That is, if the Indian company rendering the services charges a margin of 15% on the cost of services, then the safe harbour principles can be applied.

The way forward

This policy announcement is a critical step in the Viksit Bharat @ 2047 agenda. The 2047 date is an anchor to support India’s strategic AI investments in the next two decades. This helps India retain its competitive edge in the information technology space. As a next step, it will also be useful to have tax policies crafted for the financing of data centres and the use of renewable energy to make this a comprehensive framework for investors.

(The author is Partner, Deloitte India. Views are personal.)