Following the Union Budget’s announcement of a tax holiday for data and cloud centre companies, Finance Ministry sources on Wednesday clarified four key conditions that foreign firms must meet to qualify for the exemption.
The tax holiday will be available from the assessment year 2026-27 through 2046-47 and will apply to foreign companies providing cloud services globally, including in India.
Eligibility Criteria for Foreign Companies
To be eligible, the foreign cloud services provider must be formally notified, and the data centre from which it procures services in India must be an Indian company.
In addition, the data centre must be notified by the Ministry of Electronics and Information Technology (MeitY), and cloud services provided to Indian users must be delivered through an Indian reseller entity incorporated in India.
Certainty on Global Income Taxation
According to the sources, the exemption is designed to provide tax certainty to foreign cloud service providers that source infrastructure from Indian data centres. It ensures that the global income of such companies will not be subject to taxation in India solely due to the use of Indian data centre services.
Domestic Activities to Remain Taxable
Income generated from domestic economic activities will continue to be taxed under existing provisions. This includes revenue earned by resident data centres from providing services to global cloud entities, as well as income earned by Indian reseller entities from selling cloud services to Indian customers.
Safe Harbour Provision for Related Entities
A safe harbour margin of 15 per cent has been prescribed where the Indian data centre is a related entity of the foreign cloud services provider and operates on a cost-plus basis.
Level Playing Field for Data Centres
The tax treatment of foreign cloud service providers will remain unchanged regardless of whether the Indian data centre is independently owned or a subsidiary of the global entity, ensuring a level playing field across the sector.
Boost to Data Centre Infrastructure
The clarification is expected to encourage Indian data centres to offer services to global cloud providers without concerns over potential tax exposure, while supporting the development of critical digital infrastructure and attracting investment into the sector.
