The Data Centre Tax Holiday Provisions

The Data Centre Tax Holiday Provisions To enable critical infrastructure and stimulate investment, the government proposes a tax holiday until 2047 fo

The Data Centre Tax Holiday Provisions

To enable critical infrastructure and stimulate investment, the government proposes a tax holiday until 2047 for foreign companies. This incentive specifically applies to foreign entities that:

• Provide cloud services globally by utilising data centre services based in India.
• Serve Indian customers through an Indian reseller entity, ensuring that domestic service delivery is taxed appropriately.

Furthermore, to provide tax certainty for these operations, the budget proposes a safe harbour of 15% on cost for resident entities that provide data centre services to a related foreign company engaged in global cloud service provision.

The Larger Context of Direct Tax

The Data Centre Tax Holiday is part of a comprehensive overhaul of the Indian taxation system, primarily defined by the introduction of the Income Tax Act, 2025, which is scheduled to take effect from 1 April 2026. The broader direct tax context includes:

• Attracting Global Investment: Beyond data centres, the government is offering safe harbours for component warehousing (at a 2% profit margin) and a five-year tax exemption for non-residents providing capital goods to toll manufacturers in bonded zones. There is also a proposed five-year exemption on global income for non-resident experts staying in India under notified schemes.
• IT Sector Support: To support the IT sector, various services—including software development, IT-enabled services, and contract R&D—will be consolidated into a single "Information Technology Services" category. This category will benefit from a common safe harbour margin of 15.5%, with the eligibility threshold increased from ₹300 crore to ₹2,000 crore.
• MAT and Corporate Reforms: The context also involves the rationalisation of the Minimum Alternate Tax (MAT). MAT is set to become a final tax with its rate reduced from 15% to 14% starting 1 April 2026. To encourage the transition to the new tax regime, companies will only be permitted to set off brought-forward MAT credit if they migrate to the new regime.
• Simplification and Certainty: A core pillar of the new Act is reducing litigation and increasing certainty. This is evident in proposals to fast-track Unilateral Advance Pricing Agreements (APA) for IT services to a two-year conclusion period and the use of automated, rule-driven processes for safe harbour approvals.