Introduction
The Union Budget 2026-27, presented by Finance Minister Smt. Nirmala Sitharaman on February 1, 2026 introduced a long-term tax exemption, till 2047, for eligible foreign cloud service providers operating through India-based Data Centre infrastructure, in line with the vision of Viksit Bharat by 2047. The Finance Bill, 2026, inter alia, amends Schedule IV of the Income Tax Act, 2025 to exempt income of certain foreign entities which avail data centre services from specified data centres till 31.03.2047, i.e., FY 2046-47.
This has been hailed as a long-awaited policy initiative to strengthen India’s position as a global hub for digital infrastructure particularly for foreign companies investing in Indian data centres. This amendment also recognizes the central role of cloud computing, AI data centres and advanced electronics in the economic growth of India.
In this article, we examine the aforesaid exemption (for foreign entities which avail services from Indian data centres) in 3 (three) parts:
A. Meaning of Data Centre and other important terms and concepts.
B. Position of law prior to the Finance Bill, 2026 - including the prevailing tax rates and provisions of law.
C. Position of law as amended by the Finance Bill, 2026 - including eligibility conditions for foreign companies to avail such exemption and implications on Indian resellers.
The article elaborates on the implications of this amended framework for foreign businesses seeking certainty on global revenue, and for Indian resellers navigating their position within the new regime.
A. Meaning of Data Centre and other important terms and concepts
The Finance Bill, 2026 defines “data centre” as a “dedicated secure space within a building or centralised location where computing and networking equipment is concentrated for the purpose of collecting, storing, processing, distributing or allowing access to large amounts of data”. In other words, it is a dedicated facility for servers collecting, storing, processing, and accessing data. Such facilities have become quintessential for modern digital infrastructure, providing the backbone for cloud computing, email services, banking applications, and countless other digital services.
The Finance Bill, 2026 defines “specified data centre” as a data centre which is (i) set up under an approved scheme and is notified in this behalf by the Central Government through the Ministry of Electronics and Information Technology (“MEITY”) and (ii) owned and operated by an Indian company.
Foreign Cloud Service Providers (CSPs) are those foreign companies which earn income from procuring data centre services from Specified Data Centres. The Finance Bill, 2026 exempts income of such Foreign CSPs by way of procuring data centre services from a Specified Data Centre till 31.03.2047, i.e., FY 2046-47.
Indian Reseller Entities act as intermediaries purchasing and selling data centre capacity. Foreign CSPs may be using Indian infrastructure through such resellers for both global operations and servicing domestic clients.
B. Position of law prior to the Finance Bill, 2026
Prior to the Finance Bill, 2026, foreign companies were taxed in India on income accruing or arising here, at a base rate of 35% - significantly higher than the 25% applicable to domestic companies. No particular exemption existed for Foreign CSPs, and the regime offered no targeted incentives for data centres in India of the kind the Finance Bill, 2026 has now introduced.
In practice, the characterisation of the nature of income from data centre services was often contested before Income Tax authorities in adjudication/ assessment proceedings. For instance, in a situation where a foreign company, including a Foreign CSP, earns income accruing or arising in India, such income could be chargeable to income tax possibly as a Permanent Establishment (PE), or as Royalty or Fees for Technical Services (FTS), or even as income falling outside Indian tax jurisdiction, depending on the particular facts of the case. This added significant risk and an uncertain tax liability for any foreign company deploying cloud infrastructure in India.
Indian resellers, for their part, were taxable on business income as Indian entities, with GST applying to their onward supply. No equivalent exemption or incentive was available to them.
C. Position of law as amended by the Finance Bill, 2026 - eligibility conditions and implications for Indian resellers
As an incentive to boost the investment in the Indian Data Center industry, the Finance Bill, 2026 inserts an exemption into Schedule IV of the Income Tax Act, 2025, shielding income of eligible Foreign CSPs from Indian tax where that income arises from procuring data centre services from a Specified Data Centre. The exemption runs until 31.03.2047.
The following conditions must be satisfied as per Section 109 of the Finance Bill, 2026 in order to claim the exemption:
(a) The data centre must qualify as a Specified Data Centre - owned and operated by an Indian company, set up under an approved scheme, and notified by the Central Government through MeitY.
(b) The foreign company’s income must arise specifically from procuring data centre services from such a centre fulfilling the following conditions:
a. Such foreign company is notified by the Central Government;
b. Such foreign company does not own or operate any of the physical infrastructure or any resources of the specified data centre;
c. All sales by such foreign company to users located in India are made through a reseller entity being an Indian company;
d. Such foreign company maintains and furnishes such information in such form and manner, as may be prescribed; and
e. Such exemption shall be available up to tax year ending on the 31st March, 2047.
(c) Other Indian-source income remains taxable under the general regime.
The notification by MeitY (of Specified Data Centres) is significant in practice. The exemption is contingent on executive action meaning Foreign CSPs must verify - at the point of contracting - that the relevant data centre has actually been notified by the Government.
For those foreign CSPs which qualify for exemption, this amended regime delivers what the prior regime lacked, i.e., certainty. The new regime offers stability and clarity on aspects such as PE characterisation disputes, royalty arguments and withholding obligations. This materially reduces the risk associated with the kind of long-term infrastructure commitments the government is seeking to catalyse in the data centre industry.
It is pertinent to note that the Foreign CSP would not be able to avail the benefit of the tax exemption if they procure data centre services from an Indian Reseller - only direct procurements from Specified Data Centre are incentivised.
While the tax exemption does not extend to resellers, however, Foreign CSPs can avail the benefit of the tax exemption, only if, inter alia, all sales to users located in India are made through a reseller entity being an Indian company. This benefits Indian resellers as well due to consequential increased demands for their reselling services.
The framework incentivises influx of foreign capital into Indian digital infrastructure by providing a twenty-one yearlong tax holiday for foreign companies as Asia Pacific is projected to attract about USD 800 billion in data centre investment by 2030. This benefits Indian resellers and the economy in general due to the consequential increased demand for data centre reselling services and the influx of foreign capital in India.
Although Indian entities - data centre operators and resellers alike - remain within the full tax net, they will benefit by the anticipated increase in demand for their services. The exemption attempts to tap into the Data Centre market by lowering operating costs for the foreign CSPs. The policy directions introduced by the Government intends to make India the global AI and cloud infrastructure hub.
