As the global race to build AI infrastructure accelerates, India is offering foreign cloud providers zero tax until 2047 on services sold abroad if they run workloads from Indian data centers — a bid to attract the next wave of investment in AI computing, even as power shortages and water stress threaten the South Asian country’s expansion.

On Sunday, India’s finance minister Nirmala Sitharaman Office has partnered (PDF) the country’s annual budget proposal, which offers a tax holiday – effectively zero tax – on revenues from cloud services sold outside India if the services are operated from data centers in the country. Sales to Indian customers should be channeled through locally incorporated resellers and taxed within the country, he said in parliament. The budget also proposed a 15% cost-plus safe harbor for Indian data-center operators providing services to related foreign entities.

The announcement comes as US cloud giants including Amazon, Google, and Microsoft race to add data center capacity around the world to support a surge in artificial intelligence workloads, with India emerging as an increasingly attractive location for new investment. The country offers a wealth of engineering talent and growing demand for cloud services, and is positioning itself as an important alternative to the US, Europe, and parts of Asia for expanding computing infrastructure.

In October, Google said it would do so invest $15 billion to build an AI hub and expand data-center infrastructure in India, its biggest commitment to the country to date, after a $10 billion commitment in 2020. Microsoft followed in December with plans to invest $17.5 billion in 2029 to expand its AI and cloud footprint, fund new data centers, infrastructure, and training programs. Amazon also increased its spending in December, saying it would invest a an additional $35 billion in India by 2030, taking the total planned commitment to about $75 billion as it expands its retail and cloud operations.

India’s domestic data-center sector is also growing to meet global demand. In November, Digital Connexion, a joint venture backed by Reliance Industries, Brookfield Asset Management, and Digital Realty Trust, said it invest $11 billion by 2030 to build a 1-gigawatt, AI-focused data center campus in the southern state of Andhra Pradesh. The project, which spans about 400 hectares in Visakhapatnam, is one of the largest ever announced in India and highlights the growing interest from local and global investors in building AI-ready infrastructure in the country. Separately, Adani Group said in December its plan invest up to $5 billion with Google in its AI data center project in the country.

However, increasing data center capacity in India may prove difficult, given poor power availability, high electricity costs, and water scarcity. key limitations for intensive AI workloads. Those challenges can slow construction and increase operating costs for cloud providers.

“The announcements of data centers signal that they are considered a strategic business sector rather than back-end infrastructure,” said Rohit Kumar, the New Delhi-based founding partner of The Quantum Hub, a public policy and tech consulting firm. The push is likely to attract more private investment and strengthen India’s position as a regional data and computing hub, although implementation challenges regarding power availability, land access, and state-level clearances remain, he added.

Sagar Vishnoi, co-founder and director of Noida-based think tank Future Shift Labs, said India’s data-center power capacity is expected to exceed 2 gigawatts by 2026, from just over 1 gigawatt currently, and could expand more than fivefold to exceed 8 gigawatts by 2030, driven by capital investments of more than $30 billion. While the budget announced a clear goal of accelerating digital infrastructure and cloud computing, Vishnoi said allowing foreign cloud firms to earn tax-free income until 2047 represented a “strategic bet on global Big Tech,” even if India could create its own technology champions in the next two decades.

He added that routing services to Indian users through reseller entities could leave smaller domestic players competing for thinner margins, instead of receiving similar incentives upstream.

The federal budget also increased incentives to deepen India’s role in electronics and semiconductor manufacturing, as the country seeks to move beyond assembly and capture more value in global supply chains. The federal government will launch the second phase of the India Semiconductor Mission, the finance minister said, focused on producing equipment and materials, developing full-stack domestic chip intellectual property, and strengthening supply chains, while supporting industry-led research and training centers to build a skilled workforce.

In addition, the Indian government has increased spending for the Electronics Components Manufacturing Scheme by ₹400 billion (about $4.36 billion), from ₹229.19 billion (about $2.50 billion), after the program – launched in April 2025 – attracted investment commitments more than double the original target, Sitharaman said.

This scheme offers incentives tied to increased production and investment, paying a portion of the costs for companies that manufacture key components such as printed circuit boards, camera modules, connectors, and other parts used in smartphones, servers, and data-center hardware. By linking payments to actual output instead of upfront subsidies, the program is designed to attract global suppliers deeper into India’s electronics supply chain and reduce reliance on imported components – a long-standing criticism of the country’s manufacturing push.

Along with increasing the allocation of spending for the design of electronic components, the federal budget also proposed a five-year tax exemption starting in April for foreign companies that supply equipment and tools to electronic manufacturers operating in bonded zones. The change is likely to benefit companies including Apple, which relies heavily on contract manufacturing in India and was previously reported to have demanded an explanation from New Delhi to pay taxes on high-end iPhone production equipment provided by its partners.

The budget also seeks to address vulnerabilities in critical minerals, such as India grapples with tightening global supplies of rare earth materials used in electric vehicles, electronic equipment, and defense systems. The finance minister said the federal government will support mineral-rich states including Odisha, Kerala, Andhra Pradesh, and Tamil Nadu in establishing dedicated rare earth corridors to promote mining, processing, research, and manufacturing. Movement builds a seven-year incentive program approved in late 2025 to boost domestic production of rare earth magnets, as access to supplies from China – which dominates global output – is increasingly restricted.

Beyond AI infrastructure and electronics manufacturing, the Indian government is also moving to boost cross-border e-commerce, which aims to help small businesses meet global demand. The finance minister said the existing ₹1 million (about $11,000) value cap per shipment on courier exports will be removed, a move expected to benefit small manufacturers, artisans, and startups selling abroad through online platforms. The federal government will streamline the handling of rejected and returned shipments using technology, solving a long-standing bottleneck for exporters, Sitharaman said.

Overall, the latest moves underscore India’s ambition to position itself as a long-term hub for global technology infrastructure, covering cloud computing, electronics manufacturing, and critical minerals. The strategy aims to take advantage of the surge in demand for AI and shifting supply chains. However, its success will depend on implementation – from reliable power and water for data centers to continued support for local innovation – as global companies and investors weigh whether India can translate policy incentives into strong leadership in the AI ​​era.