The Union Budget has rolled out a long-term tax framework aimed at turning India into a global hub for data centres and cloud services, but the announcement has triggered a wider debate on whether fiscal incentives alone can deliver that ambition. While the tax sops promise certainty and clarity for global investors, industry voices caution that deeper structural challenges—especially power and policy coordination—could limit the impact.

A central feature of the Budget is a targeted tax holiday extending until 2047 for foreign companies providing global cloud services through data centres located in India. The exemption applies strictly to income earned from overseas customers, a move designed to eliminate long-standing tax ambiguities that previously discouraged multinational cloud providers from routing global operations through Indian facilities. By offering a clear, long-term assurance, the government hopes to attract major hyperscalers and international data centre operators.

However, the concession does not extend to domestic business. Services provided to Indian customers must be routed through Indian resellers and will continue to be taxed in India. This structure ensures that while India becomes a base for global data processing, revenues generated within the country remain subject to domestic taxation. Tax experts say this balances investor confidence with the government’s revenue interests.

The Budget also introduces a 15% safe harbour margin for Indian data centre operators providing services to related foreign entities. Under this transfer pricing provision, profits are fixed at cost plus 15%, reducing disputes over profit attribution and valuation. For years, disagreements over whether payments constituted royalties or fees for technical services had resulted in litigation and uncertainty. The new safe harbour is intended to provide predictability and cap exposure.

Industry executives say the changes respond to some of the most persistent concerns faced by global cloud providers. Previously, foreign companies using Indian infrastructure risked being seen as having a taxable presence in India, particularly under the “significant economic presence” concept. The tax holiday clarifies that using Indian data centres to serve global customers will not, by itself, trigger tax liability in India until 2047, provided the prescribed conditions are met.

Tax consultants explain that the exemption is tightly defined. A foreign cloud provider can lease or use space in a government-approved Indian data centre owned by an Indian entity and serve overseas customers without paying tax in India. But to serve Indian customers, the provider must operate through a separate Indian reseller or distributor. This ensures domestic taxation while preserving the attractiveness of India as a global service hub.

Senior executives from the technology sector have welcomed the clarity, describing it as a long-awaited move that allows companies to plan investments over decades. Data centres typically involve heavy upfront capital expenditure and long payback periods, making policy stability critical. The 20-plus-year certainty offered by the tax holiday is seen as a strong signal to global investors.

Yet, several experts argue that the tax measures address only one part of the equation. A managing director of a government and policy consulting firm pointed out that India holds nearly 20% of the world’s data but accounts for only a small share of global data centre capacity. Smaller countries such as Malaysia, despite having far smaller populations, have emerged as preferred destinations due to reliable power supply, faster approvals and coordinated policymaking.

Power availability remains the most pressing concern. Data centres, especially those supporting artificial intelligence workloads, require massive and uninterrupted electricity. In India, delays in building transmission infrastructure can stretch to four years, compared to about a year in competing markets. Fragmented responsibilities between power, renewable energy and industrial departments further complicate execution. Experts warn that without addressing these bottlenecks, tax incentives alone may not translate into large-scale investments.

There are also reservations about the 15% safe harbour margin. Executives from large IT and infrastructure firms argue that data centres are extremely capital-intensive, with depreciation accounting for 50–60% of costs and electricity another 10–15%. Manpower costs are relatively low. In such a structure, a more realistic margin might be closer to 8–10%. While the safe harbour reduces litigation risk and provides an upper limit, some fear it could inflate costs or deter certain business models.

On the economic front, there is broad agreement that data centres are not significant job creators and place heavy demands on power and water resources. However, industry leaders stress their strategic importance. Like semiconductor manufacturing, data centres are considered critical national infrastructure, essential for data sovereignty, cybersecurity and digital resilience. Large investments can also generate multiplier effects across construction, equipment manufacturing, power transmission and local supply chains.

Overall, the response to the Budget measures is cautiously optimistic. The tax sops offer rare long-term certainty and could encourage global hyperscalers and pure-play data centre operators to expand in India. But most experts agree that fiscal incentives alone will not make India globally competitive.

To fully realise its digital ambitions, India will need reliable power, faster transmission rollouts, streamlined approvals and a coherent national data centre policy that aligns energy, infrastructure and digital regulations. Without these complementary reforms, the tax sops may attract interest—but not the scale of investment needed to truly position India as a global data centre powerhouse.