Safe harbour rules are defined under Section 92CB of the Income-tax Act, 1961, for the determination of arm’s length price under section 92C or section 92CA. Safe harbour means circumstances in which the income-tax authorities accept the transfer price as declared by the assessee. Transfer Price is the actual price charged in a transaction between related entities which are part of the same multinational enterprises (MNE) group.

Besides algorithmic innovation and training data sets, one of the key elements needed to build large AI systems is computing capacity or compute supplied by data centres. As a result, data centres sprawling acres of land have come to form the bedrock of the AI industry. These facilities run millions of servers packed with powerful chips while consuming massive quantities of resources such as electricity and water.

Experts have pointed out that the government’s proposed tax break could have a multiplier effect on the digital economy, as local data centres could allow overseas tech companies to meet the country’s surging AI demand while also enabling them to serve global markets from India. Increasing India’s domestic data centre capacity could also lower costs for smaller firms to access the compute they need to train and build such AI systems. However, the rapid growth of data centres in India could strain the country’s resources and negatively impact the environment.

Microsoft, Salesforce on tax holiday proposal

Calling the proposed tax holiday a significant move, Puneet Chandok, President, Microsoft India & South Asia, said, “Long‑term policy certainty recognises that digital infrastructure is now strategic national infrastructure. As AI adoption accelerates across sectors, secure and resilient compute capacity will underpin public services, enterprise innovation, and long‑term competitiveness.”

“At Microsoft, our commitments in India closely align with this direction. We are expanding hyperscale cloud and AI infrastructureincluding new regions, while continuing to invest in skilling at scale,” Chandok added.

Arundhati Bhattacharya, President & CEO, Salesforce South Asia, said, “The tax holiday until 2047 for cloud services is a masterstroke in data sovereignty, attracting an estimated $50 billion in data center investments by 2030 while positioning India as the cloud hub for emerging markets.”

Bhattacharya also flagged the lack of R&D investment as a critical gapwarning that it could make India a country with sophisticated consumers of AI rather than innovators of the technology.

India’s data centre market

Global giants such as Google, Microsoft, Amazon Web Services, and Meta as well as local players such as Reliance Industries are pumping billions of dollars into India’s data centre market, which is poised for “explosive growth”, according to global real estate advisory JLL.

Currently, India accounts for just three per cent of data centres across the world, with 70 per cent of them located in high-income countries, as per World Bank data cited by the Economic Survey 2026-27. By 2026, India’s total data centre capacity is projected to surpass 2 GW, up from a little over 1 GW. By 2030, it could exceed 8 GW, driven by capital investments estimated at over $30 billion, as per various estimates.

Speaking at a press conference following the presentation of the Union Budget, IT Minister Ashwini Vaishnaw said that investments in India’s data centre sector could rise sharply to $200 billion, up from the $70 billion of investments currently being executed. “We are also seeing interest from AI server manufacturers to invest in India,” Vaishnaw added.

What the Finance Bill, 2026 says

The Finance Bill, 2026 proposes to retrospectively amend Schedule IV of the Income-tax Act, 1961, to exempt a foreign company’s income accruing or arising in India as a result of procuring data centre services from a specified data centre, for a period up to the tax year ending on March 31, 2047.

A ‘specified data centre’ is defined as “a data centre which is set up under an approved scheme and is notified in this behalf by the Central Government in the Ministry of Electronics and Information Technology; and is owned and operated by an Indian company.”

Data centre services are defined as “services provided by a data centre through the use of physical infrastructure including land, buildings, mechanical electrical power equipment’s, cooling system, security and information technology infrastructure including servers, computers, storage systems, operating systems, security solutions, network and associated software platforms, networking and other equipment, human resource in India.”

Under the Bill, one of the conditions for the tax exemption is that services provided to Indian users by the foreign company must be routed through an Indian re-seller entity. The foreign company must also not own or operate any of the physical infrastructure or any resources of the specified data centre in order to qualify for the tax break. Upon passage of the Bill, the proposed amendments will take effect from April 1, 2026.

Impact on smaller cloud players

Industry body Nasscom said that the proposed tax holiday linked to data centres “sends a clear signal to attract long-term global investment and support the expansion of India’s compute capacity”. It added that the 15 per cent on-cost safe harbour proposal ensures pricing certainty for routine infrastructure services.

“On a broad reading, the combined design of these measures helps address long-standing interpretational challenges by clearly separating cloud service activity from data centre operations and aligning India’s taxing rights with arm’s length remuneration, thereby improving ease of doing business and investment confidence,” the statement read.

While the government’s intent to accelerate the broader AI ecosystem is evident, the policy architecture underplays direct, large-scale incentives for homegrown deep-tech startups and founders, according to Sagar Vishnoi, Director and co-founder, Future Shift Labs. “Because services to Indian users must be routed through an Indian re-seller entity, smaller domestic players may end up competing for re-seller margins rather than receiving comparable upstream incentives themselves,” he added.