With a push to store data domestically, the government has proposed extending tax holidays until 2047 for foreign companies that provide cloud services to global customers using data centre infrastructure in India. The catch, however, is that such companies must serve Indian customers through an Indian reseller entity.
Experts argue that tax holidays until 2047 and routing incentives could lure as much as $60 billion in FDI from players such as AWS, Azure, and Google, targeting nearly 20 GW of data centre capacity. This push comes at a time when India’s foreign direct investment inflows have been on a declining trajectory after peaking in 2021–22, when net inflows, adjusted for outflows, stood at around $70–72 billion, before falling to roughly $52 billion in recent years.
“India’s low-cost power (₹5 per unit), cable infrastructure, and UPI ecosystem offer lower-latency advantages compared with regulatory and cost hurdles in China and the EU,” says Alay Razvi, Managing Partner at Accord Juris.
1 January 2026
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As per a report by Kotak Mutual Fund, data centre development costs in India are among the lowest globally, with only China being cheaper, while India’s electricity costs are a fraction of those in the US, UK, and Japan. Some however, warn that this could backfire.
They argue that large data centres could consume thousands of MWh of electricity at subsidised rates, strain water tables due to cooling requirements, and benefit from import duty exemptions on hardware, in addition to generous tax breaks.
This policy push also coincides with major investment commitments already announced by global tech companies. In October last year, Google made an eye-catching $15 billion investment in an AI data centre in Andhra Pradesh, its largest investment in India to date.
Similarly, during a rare visit to India last year, Microsoft CEO Satya Nadella announced an investment of $17.5 billion by 2030 to build digital infrastructure and sovereign capabilities in the country.
"In practical terms, this push will help by enabling such enterprises to treat India not merely as a consumption market, but as a strategic production and export base for digital services, thereby integrating Indian data centre infrastructure into their global delivery architecture," says Tushar Kumar, Advocate, Supreme Court of India.
As the government highlighted in a post-budget press conference, the aim is to ensure that global cloud companies are not deterred from expanding their footprint in India for serving international markets.
The Safe Harbour Provision
The finance minister also said that if an Indian data centre company provides services to its own foreign group entity, such as an Indian arm serving its global cloud parent, it will be allowed to earn a fixed 15% markup on operating costs, including electricity, cooling, and maintenance.
If the company opts for this framework, tax authorities will treat the pricing as arm’s length and will not subject it to scrutiny. For instance, a data centre with ₹100 crore in operating costs can bill its foreign parent ₹115 crore, with the ₹15 crore margin remaining free from tax challenges. This offers much-needed certainty to operators, particularly in a sector that runs on thin margins and lacks reliable domestic benchmarks for pricing.
Experts such as Razvi note that most transfer pricing disputes arise from disagreements between companies and tax officers over what constitutes a “fair price” for services exchanged between related entities. By fixing the margin at 15%, the government removes this subjectivity. Companies that opt in are shielded from pricing adjustments for several years, significantly reducing litigation, penalties, and delays. The approach mirrors earlier safe harbour rules for IT services, which helped curb tax disputes.
For capital-intensive data centres, this helps manage cash flow and lowers tax risk. “The government’s use of safe harbour provisions to de-risk infrastructure investments for global cloud providers is a smart and necessary first step. By creating policy certainty through 2047, we are finally addressing the cost arbitrage that kept India off the map for cloud delivery infrastructure. This approach should become the template for future incentives to local innovators as well,” says Pranav Pai, Managing Partner at 3one4 Capital.
As per global real estate advisory firm JLL, India’s data centre capacity is projected to surge 77% by 2027 to reach 1.8 GW. “India already contributes nearly 20% of the global data economy, while the global data centre market stands at approximately 120 GW. Even capturing 1% of this opportunity highlights the scale of the current capacity gap and the headroom for growth,” says Narendra Sen, Founder and CEO of Rackbank Data Centers.
While hyperscalers are set to expand rapidly, some highlight that it will be an area of mixed concern for home grown companies. "While the tax holiday helps global players enter India quickly, large-scale and mission-critical operations naturally gravitate towards Indian entities because predictability in taxation, compliance, and regulatory alignment matters far more than headline tax rates as businesses scale," says Sunil Gupta, Co-Founder, CEO and MD, Yotta Data Services.
On the other hand, heightened competition and aggressive pricing by global players may compress margins and accelerate sectoral consolidation. As Pai notes, “If safe harbour mechanisms can attract global capital and capabilities to build from India, the same principle must extend to homegrown innovators taking Indian technology global.”
