Why Budget tax sops to attract foreign investment upset Indian data centres

The new Budget provides for tax sops to attract more foreign investments in India's data centres. So why are some Indian players upset?

The government’s decision to provide tax holidays to foreign Cloud service providers (CSP) till 2047 will bring much-required clarity on taxation issues, but it has clearly divided the data centre industry in the country.

 

For hyperscalers like Google,Microsoft and Amazon Web Services (AWS), this is a welcome move. For a lot of Indian data centre providers and Cloud services players, however, this is a biased play.

 

According to Minister of Electronics and Information Technology Ashwini Vaishnaw, in comments made after the February 1 Budget, the tax holiday could attract $200 billion worth of investments. But the Bharath Digital Infrastructure Association (BDIA), which represents local data centre operators, disagrees, citing the Budget’s use of the word “reseller” to describe Indian businesses.

 

The Budget proposes “a tax holiday up to 2047 to any foreign company who provides services to any part of the world outside India by procuring data centre services in India. Sale of such services to Indian users shall be made through an Indian reseller entity and taxed appropriately.”

 

Abhishek Bhatt, secretary general, BDIA, told Business Standard that “to achieve true digital sovereignty in an era where data localisation is a growing global mandate, we must ensure that the role of Indian entities is not inadvertently limited to that of a ‘reseller’ or ‘toll collector’ for foreign platforms. Such a model siphons high-value platform margins offshore while leaving domestic firms with thin

distribution residuals”.

 

Some of the players that Business Standard spoke to also said that by using the word ‘reseller’ the government is diluting the role of Indian data centre and cloud service providers. “What was the need to say that the tax holiday is for ‘foreign’ players? It could have given a fair footing for all,” said a source on condition of anonymity.

 

Bhatt added: “We ask that this holiday be made applicable to Indian firms exporting cloud and AI services…. By empowering Indian champions alongside global giants, we can ensure India evolves from being the world’s data centre floor into its cloud services brain.”

“We urge the government to build a mechanism that makes our indigenous startups the true ‘brains’ of this ecosystem, having already demonstrated their innovation capacity by filing patents in cloud, compute, and AI technologies. We must empower

our own innovators who have the patents to lead the global market,” he said.

 

Meanwhile, tax practitioners from the Big four consulting firms said the Budget proposal was made to do away with certain tax anomalies.

 

“The tax exemption is proposed with a view to avoiding any potential tax dispute in the future on whether storage of a software platform or data on a data centre in India by foreign cloud service providers can lead to its permanent establishment in India, thereby leading to potential tax implications in India. To allay taxpayer concerns and avoid uncertainty on this issue, the government has proposed this amendment,” said Himanshu Parekh, tax partner at KPMG India.

Two conditions

But experts also say there are two conditions for this tax holiday – it is not that any and every data centre can host CSP data. The government will come up with a list of specified data centres and these companies have to make an application for a tax holiday. And if the foreign CSP wants to provide cloud services to an Indian customer, then it needs to have an intermediary in India or work with an Indian reseller.

 

The Budget proposes to provide “a safe harbour of 15 per cent to the resident entity providing data centre services to a related foreign company (who is providing cloud services to any part of the world outside India).”

 

Currently, all foreign CSPs such as Google, AWS and Microsoft face the argument from Indian tax authorities that payments made by Indian clients constitute a royalty, or fees for technical services, and are therefore subject to a withholding tax in the range of 10 to 15 per cent, as prescribed under applicable double taxation treaties. This issue is currently under litigation.

 

Transactions for data centre services between a foreign entity and its related Indian data centre provider shall qualify for a 15 per cent margin over cost, simplifying transfer pricing compliance.

 

Both Indian and foreign CSPs operating in India are liable to the standard corporate tax regime of 25 per cent if the annual revenue is up to ₹400 crore and 30 per cent above that, in addition to surcharge and cess.

 

“When a foreign CSP runs a data centre locally, it runs the risk of creating a Permanent Establishment (PE), meaning profits attributable to that PE are taxable in India and (the company) must comply with transfer-pricing under Sections 92-92F,” explained Ritika

Loganey Gupta, partner and GCC sector tax leader, EY India. With the new proposals, foreign CSPs entities pay zero corporate tax on PE-related income from these operations.

 

But Indian data centre companies such as Yotta Infrastructure, Nxtra, AdaniConneX, Ctrl S and Equinix and Sify Technology will not accrue any tax benefit and will remain subject to the standard corporate tax regime.

 

“Indian CSPs are not eligible for this tax holiday, which creates a potential cost advantage for foreign hyperscalers embarking on global service delivery from India. That said, the initiative is intended to catalyse large-scale infrastructure deployment, enhance digital backbone resilience, reduce latency and — in turn — support India’s entire cloud ecosystem, including domestic players,” Gupta added.

Yotta Infrastructure CEO Sunil Gupta does not believe this puts Indian cloud operators at a disadvantage.

 

“These developments shall grow the data centre and GPU infrastructure capacity outsourcing from Indian players by these foreign players in a big way. Also since foreign players shall have to use Indian entities to serve Indian customers and pay regular tax on those profits, these budget provisions do not impact or put Indian sovereign cloud operators at any disadvantage.”

 

Asia’s third largest economy now boasts of a load capacity  of 1.5-1.7 gigawatt (Gw) in 2025, which is expected to expand five-fold to 8 Gw by 2030, according to research firm Jefferies. Almost 70 per cent of it is now being driven by hyperscalers such as Amazon Web Services (AWS), Microsoft and Google.

 

The huge demand, the JLL report says, will be driven by growing adoption of AI technologies as AI servers consume five to six times more power than traditional setups and require advanced liquid cooling systems.

 

India’s data centre industry reached a major milestone in October when Google announced plans to set up a 1 gigawatt AI data centre in Vishakhapatnam, investing $15 billion over the next five years.

 

The data centre industry has become prominent over the last one-and-a-half decades, helped by the onset of cloud technology, an e-commerce boom, use of smartphones and social media, and the government’s push for a digital economy.

 

The country’s information technology (IT) spend is projected to touch $176.3 billion in 2026, rising 10.6 per cent from 2025, and outpacing the 9.8 per cent growth expected globally, according to the latest forecast by Gartner Inc., a business and technology insights company.

 

The growth is being propelled by investments in data centres and software, according to its latest forecast. The data centre segment in India is projected to record the highest annual growth rate of 20.5 per cent in 2026. It would continue to outpace all other IT segments despite moderating from 29.2 per cent in 2025, said the report.

 

Besides the hyperscalers, Indian conglomerates have also joined the data centre bandwagon. Nxtra Data, Bharti Airtel’s data centre arm, is looking to invest about ₹4,500-6,000 crore in the next three to four years to take pole position in the country.

 

Reliance is setting up the world’s largest data centre, 3 Gw facility, in Gujarat’s Jamnagar, while Adani ConneX, a joint venture between Adani Group and EdgeConnex, aims to build a 1 Gw data centre infrastructure platform by 2030. Tata Consultancy Services announced its foray into the data centre business by setting up HyperVault with a $1 billion investment from private equity player TPG. 

Digi infra push

 

• Tax holiday to bring in $200 bn investments
• Tax holiday to bring in clarity on taxation for foreign players
• Services being provided by a foreign company to Indian users shall be made through an Indian reseller
• Data centre load capacity at 15-1.7 Gw in 2025
• Expected to expand five fold to 8 Gw by 2030