Budget 2026 can catalyse India's journey towards becoming global data hub

With long-term capex needs, the data centre sector is seeking a stable, predictable tax regime in Budget 2026 to boost investor confidence and position India as a global data hub

India is approaching a pivotal moment in its digital infrastructure journey. As Artificial Intelligence (AI), cloud computing, fintech, and latency-sensitive applications reshape the global economy, data centres have become a strategic national asset. And for India, the question is no longer about demand—it’s more about whether the country can make policy and tax choices bold enough to build the country as a trusted global data hub. The upcoming Budget 2026 could provide a critical headstart to direct the future of India’s digital infrastructure and position the country as a leader in the global data economy.

 

The digital opportunity 

Currently, India’s installed capacity is roughly 1.5 GW, which is projected to grow and reach around 14 GW by 2035. This growth, which would require more than $70 billion in investments, is a once-in-a-generation opportunity. India’s strengths lie in its competitive operating cost, large scale, land availability, and skilled workforce. This is further supported by national and state-level policies and a robust data protection framework, which builds trust among global investors and users. These strengths were the foundation of the Indian digital journey till now.

 

 

The realisation of this digital opportunity depends on the choices made by the government in drafting its policies, including tax policies. The government has implemented several initiatives to strengthen the domestic data centre setup, such as mandating data localisation, allocating funds for a centre of excellence in AI in Budget 2025, and offering various incentives (stamp duty waiver, electricity duty exemption, land subsidies, etc.) through state governments. Nonetheless, further policy harmonisation is essential to accelerate the growth of India’s data centre sector. We will focus on tax policy choices for the purpose of this piece. Tax policies can significantly impact returns and competitiveness in this capital-intensive sector. The sector is expecting changes in Budget 2026 which can help it navigate taxes with certainty. 

 

The permanent establishment ambiguity 

The foremost issue that has been in focus for a while and warrants amendments to provide tax certainty is the Permanent Establishment (PE) challenge. Most hyperscale data centre business models entail overseas entities using Indian data centres to provide cloud services to users. In recent times, doubts have been raised whether such models can give rise to a taxable presence or PE for the overseas entities in India and hence trigger taxability where the rates and amounts are also unclear. To address this ambiguity, there is a need for clear rules that confirm that such data centre operations of international players do not lead to a PE in India. Any such changes should apply to existing and new investments in order to provide a clear framework for all players, existing as well as new.

 

Tax depreciation of integrated data centre facilities (which comprise buildings, machinery, computers) is another area where clarity would be helpful. Different assets used in a data centre attract different rates of tax depreciation. There’s a need for a clearer depreciation regime which could provide a single high depreciation rate (given the speed of technological obsolescence) for an integrated data centre facility. Clarification with regard to tax deductibility of sustainability-linked expenses, such as carbon credits and renewable energy certificates, is also warranted. Additionally, introduction of incentives linked to power usage effectiveness could boost greener infrastructure. 

 

Reasonable safe harbours 

Regarding transfer pricing, outcomes depend on operating models and the functional, asset, and risk profiles of Indian entities. Export-oriented data centre operations might fall under safe harbour rules for IT-enabled services, but this is not always clear, especially for asset-heavy operations. Clear guidance on safe harbours and the treatment of third-party costs (power, connectivity, maintenance) is needed to reduce disputes.

 

Input tax credit for establishment costs 

Under the Goods and Services Tax (GST), a recent clarification that data hosting and infrastructure support services are exports, allowing for refunds of unutilised GST credits, has brought about welcome changes. However, denial of Input Tax Credit (ITC) on construction, particularly for hyperscale data centres, and divergent views on the taxability of 99-year leasehold rights and the ITC for lease premiums and rents continue to create uncertainty and add to set-up costs. This area also requires clarity to allow players to make investments with confidence.

 

By holistically addressing the above issues, the government can establish a predictable and trusted data centre ecosystem. India has already recognised data centres as infrastructure and strengthened its data protection laws. Introduction of measures to provide tax certainty via Budget 2026 could be a turning point to take the next big leap. 

 

Long term vision 

While these reforms are necessary and could be implemented in the short term, India should also think ambitiously about its long-term digital infrastructure strategy. Other countries are exploring new concepts such as ‘data embassies’ that host sovereign data under diplomatic protections and integrated ‘data cities’ that connect data centres, cloud service providers, AI labs, and fibre infrastructure under a unified policy framework. For India, these initiatives could position the country as one that offers trusted future-ready digital ecosystems.

 

The growth in the data centre sector, with large and long-term capex, demands a predictable, investor-friendly tax and regulatory framework spanning the entire lifecycle of data centres. Union Budget 2026 can address the above asks of the sector, allowing players to plan capacities and strengthening India’s position as the favoured destination for such investments. These changes can signal India’s willingness to provide a stable and predictable regime and will determine whether India is able to capitalise its full potential to become a global data hub.

 

The writers are Partner Price Waterhouse & Co LLP 

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