The Indian government has introduced a landmark 20-year tax holiday for foreign companies utilizing local data centers to provide global services. This strategic move, announced during the Union Budget 2026-27, aims to establish India as a premier international hub for digital infrastructure and cloud computing. By offering tax certainty until 2047, the government intends to attract massive foreign investment and accelerate the growth of the country’s artificial intelligence and information technology sectors.
Finance Minister Nirmala Sitharaman unveiled the incentive to address long-standing concerns regarding potential tax liabilities on the global earnings of overseas firms. Previously, international companies feared that using Indian-based servers might lead to their worldwide income being taxed by Indian authorities. The new policy clarifies that foreign enterprises providing cloud services to global customers through Indian data centers will remain exempt from such taxes for the next two decades.
Strengthening Global Digital Infrastructure
This tax exemption specifically targets hyperscalers and cloud service providers that serve international clients from Indian soil. While global services are exempt, any revenue generated from serving Indian customers through a local unit will continue to be taxable under existing laws. This distinction ensures that while India courts global business, it maintains a fair tax structure for domestic consumption.
The government expects this policy to trigger a significant influx of capital, with some estimates suggesting potential investments could reach up to $200 billion. Major technology leaders have already noted the impact of these incentives. NVIDIA CEO Jensen Huang highlighted that such measures would encourage both global and domestic firms to build critical infrastructure locally. Although data centers are not large direct employers, they support a vast “derivative workforce” including construction workers, electricians, and plumbers during development.
Strategic Benefits for AI and Tech Sectors
Beyond the tax holiday for foreign firms, the 2026 budget includes measures to support the domestic ecosystem. The government has proposed a 15 percent safe harbor for Indian data center service providers with a threshold of Rs 2,000 crore. This is designed to simplify tax compliance and provide stability for companies handling large-scale data operations.
The focus on data centers is part of a broader push to bolster the “infrastructure layer” of India’s digital architecture. Officials believe that bridging the gap between data generation and storage will drive down computing costs for local businesses and startups. As artificial intelligence continues to evolve, the government views robust data center infrastructure as the foundation for future economic growth and high-tech job creation across multiple sectors.
Stability and Certainty for Investors
Industry experts have welcomed the announcement, noting that it provides the institutional stability required for global enterprises to shift mission-critical workloads to India. By extending the tax holiday until 2047, the government is offering a long-term window that allows companies to commit to large-scale capital expenditure. This extended timeline is intended to remove the “tax risk” associated with localized data centers in a volatile global climate.
The budget also simplified the framework for Global Capability Centres (GCCs). The threshold for availing safe harbor for IT services was increased from Rs 300 crore to Rs 2,000 crore. Additionally, various service categories such as software development, KPO, and R&D have been unified under a single “information technology services” umbrella with a common safe harbor margin of 15.5 percent. These combined efforts signal India’s ambition to become the world’s digital back-office and a leader in AI research and development.
