The Union Budget’s announcement of a long-term tax exemption for foreign cloud and data service providers will apply only if four mandatory conditions are met, Finance Ministry sources clarified on Wednesday, providing operational certainty to global firms planning to use Indian data centres.
According to the sources, the tax holiday will be available from the 2026–27 assessment year through 2046–47 for foreign companies providing cloud services globally, including services accessed by Indian users. However, eligibility for the exemption will depend on compliance with specific regulatory and structural requirements.
The first condition requires that the government officially notify the foreign cloud service provider. Secondly, the data centre from which services are procured must be an Indian company, ensuring that the core infrastructure remains domestically owned or registered.
A third requirement mandates that the data centre must be notified by the Ministry of Electronics and Information Technology (MeitY). Additionally, services offered by the foreign cloud company to Indian customers must be routed through an Indian reseller entity, which must also be an Indian company.
Finance Ministry sources explained that the exemption aims to remove tax-related uncertainty for foreign cloud service providers using Indian data centres. Under the new framework, such companies will not face the risk of their global income being taxed in India solely due to the use of Indian-based data centre services.
At the same time, income generated from domestic economic activities will remain taxable under existing laws. This includes profits earned by Indian data centre companies providing services to global cloud firms, as well as revenue generated by Indian reseller entities selling cloud services to Indian customers.
In cases where the Indian data centre operates as a related entity of the foreign cloud company, a safe harbour margin of 15 per cent has been prescribed under a cost-plus model, according to the sources.
The tax treatment for foreign cloud service entities will remain unchanged regardless of whether the Indian data centre is independently owned or a subsidiary of the global firm. Officials said this approach ensures a level playing field across ownership structures.
The clarification is expected to boost confidence among Indian data centre operators, allowing them to offer services to global cloud companies without concerns over triggering unintended tax liabilities for their overseas clients.
The policy move is part of the government’s broader strategy to develop critical digital infrastructure, attract long-term investment in data centres, and strengthen India’s position as a global hub for cloud and digital services.
