The Union Budget outlines long-term tax incentives for global cloud providers using India-based data centres, alongside fresh measures to strengthen semiconductor manufacturing, electronics components, and tax certainty for the IT services sector.
The government has unveiled a proposal to offer a 20-year tax holiday to attract sustained investments into the country’s rapidly expanding data centre ecosystem, signalling a strong push to position India as a global digital infrastructure hub.
The incentive is aimed primarily at foreign cloud service providers that serve international customers through data centres located in India. Under the proposed framework, these companies will route services for Indian users via locally incorporated reseller entities, ensuring domestic participation while maintaining global delivery capabilities.
To address transfer pricing concerns, the budget introduces a safe harbour margin of 15 percent on costs in cases where the Indian data centre operator is a related entity. This move is intended to provide clarity and reduce disputes, encouraging multinational firms to scale operations in India with greater confidence.
Union Minister for Electronics and Information Technology Ashwini Vaishnaw highlighted the strategic importance of data centres, especially those supporting artificial intelligence workloads. He noted that investments worth nearly $70 billion are already in progress across the sector, with an additional $90 billion announced, reflecting strong investor interest.
Push for semiconductor equipment and design ecosystem
Alongside data centre incentives, the budget announced the launch of India Semiconductor Mission (ISM) 2.0, marking the next phase of the country’s semiconductor roadmap. Building on ISM 1.0, which laid the groundwork for domestic chip manufacturing, the new phase will focus on semiconductor equipment design and manufacturing.
ISM 2.0 will also support the production of key materials used in chip fabrication, expand India’s semiconductor design ecosystem, and strengthen talent development initiatives. A budgetary allocation of ₹1,000 crore has been earmarked for the mission.
The government has also significantly enhanced funding for the Electronics Components Manufacturing Scheme, raising the allocation from around ₹22,000 crore to ₹40,000 crore. According to Vaishnaw, the scheme has already attracted 149 applications—far exceeding initial expectations—prompting the higher allocation to maintain growth momentum.
Simplified tax framework for IT services
The budget further proposes wide-ranging tax simplification measures for the IT services sector, India’s largest export services segment with exports exceeding $220 billion. All IT and IT-enabled services, including software development, KPO, and contract R&D, will be brought under a single classification.
A uniform safe harbour margin of 15.5 percent has been proposed, with the eligibility threshold increased from ₹300 crore to ₹2,000 crore. Approvals will be processed through an automated, rule-based system, while faster unilateral advance pricing agreements and modified return provisions aim to enhance tax certainty for the industry.
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