Budget 2026: The Finance Ministry on Tuesday clarified the scope and conditions of the data center tax exemption announced in the Union Budget 2026, noting that the measure is designed to provide tax certainty to foreign cloud service providers and strengthen India’s position as a global data hub.

According to ministry sources, the exemption ensures that the global income of foreign cloud companies will not be taxed in India just because they procure data center services from the country. The clarification addresses long-standing concerns among multinational cloud players, including hyperscalers such as Google, Microsoft and Amazon Web Services (AWS), about the risk of creating a taxable presence in India by using domestic data infrastructure.

The waiver will take effect from April 1, 2026 and will apply from fiscal year 2026-27 to fiscal year 2046-47, providing a long-term policy horizon of more than two decades. It will be available to foreign companies that provide cloud services globally, including in India, and provide data center services from notified facilities located in the country.

Finance Ministry officials said there are four essential conditions that foreign cloud companies must meet to qualify for the exemption. First, the foreign cloud service provider must be notified in accordance with the relevant provisions. Second, the data center company from which the services are procured must be an Indian company. Thirdly, the data center itself must be notified by the Ministry of Electronics and Information Technology (MeitY). Fourth, cloud services provided by the foreign company to Indian users must be routed through an Indian reseller entity, which must also be an Indian company.

The ministry stressed that the exemption is designed to provide certainty to foreign cloud companies procuring data center services in India, ensuring that there is no risk of their global income being taxed in the country on that account alone.

At the same time, the government has clarified that income derived from domestic economic activities will continue to be taxed in India. This includes profits earned by resident data center companies for providing services to global cloud entities, as well as revenue earned by Indian reseller entities for reselling cloud services to Indian customers. This income will be taxed in the same way as that of any other domestic company.

In cases where the Indian data center is a related entity of the foreign cloud company, such as a captive cost-plus center, the estimate provides a safe harbor margin of 15%, providing clarity on acceptable profit levels and reducing transfer pricing disputes.

Importantly, the tax treatment of foreign cloud service providers will remain the same irrespective of whether the Indian data center is independently owned or a subsidiary of the global entity. Officials said this ensures a level playing field across the sector and eliminates any perception of differential treatment.

With this clarification, the government believes that Indian data center operators can confidently offer services to global cloud companies without those entities fearing unwanted tax exposure in India, which could accelerate investments in digital infrastructure and cloud ecosystems across the country.

Tax holidays and investments

According to Electronics and Information Technology Minister Ashwini Vaishnaw in comments made after the Budget on February 1, the tax break could attract investments worth $200 billion. However, the Bharath Digital Infrastructure Association (BDIA), which represents local data center operators, has expressed reservations, citing the budget’s use of the term “reseller” to describe Indian companies.

The budget proposes “a tax exemption till 2047 for any foreign company providing services anywhere in the world outside India by purchasing data center services in India. The sale of such services to Indian users shall be made through an Indian distribution entity and shall be taxed accordingly.”

Meanwhile, tax professionals from Big Four consulting firms said the Budget proposal sought to eliminate certain tax anomalies. “The tax exemption is proposed with a view to avoid any potential tax disputes in the future as to whether the storage of a software platform or data in a data center in India by foreign cloud service providers can lead to their permanent establishment in India, leading to potential tax implications in India. To alleviate taxpayers’ concerns and avoid uncertainty on this issue, the government has proposed this amendment,” KPMG Himanshu said.