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Tax ‘edge’ for foreign firms puts local data centre companies on edge
The budget proposal to provide a 20-year tax holiday for overseas investors setting up data centres in India has caused discontent among domestic companies. They fear this policy would put Microsoft, Amazon Web Services (AWS) and Google at a distinct advantage over Indian infrastructure companies that have invested billions of dollars in building the country's digital backbone.
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The Bharat Digital Infrastructure Association (BDIA), which represents local data centre operators, has prepared a seven-point policy charter that it aims to submit to the government seeking corrective measures to ensure a level playing field. ET has reviewed the document.
“The tax holiday incentivises exports, which brings its own benefits — investments lift infrastructure standards, deepen talent pools, and strengthen supply chains across the ecosystem,” said BDIA secretary general Abhishek Bhatt. “In its current form, it offers no incentive to Indian cloud and data centre companies operating in India, and instead encourages them to create foreign structures.”
The policy must support indigenous value creation, he said.
The budget proposal offers a tax holiday until 2047 exclusively to foreign companies that provide cloud services globally using data centres located in India. Indian companies running the same infrastructure will continue to pay the standard corporate tax at 25.7%, they said.
“The measure of success for India's data centre policy should not be how many megawatts of capacity foreign companies build here,” said ESDS managing director Piyush Somani. “It should be how much of the cloud economy's value chain India actually owns.”
Somani drew a parallel with the success of Indian IT services that was built not just by offering cheap manpower, but also capturing global value. He added that India needs to be a “cloud superpower and not just a cloud warehouse.”
Balancing act
Executives said the asymmetry could materially shift pricing power in favour of the three hyperscalers in a market that already has among the lowest rack rentals in the world.
The move may even weigh on the upcoming listing of the smaller domestic players such as Sify Technologies, Yotta Data Services and ESDS Software Solutions.
However, Yotta chief executive Sunil Gupta was more welcoming of the announcement.
The budget announcement is “structurally positive” and “expands the market rather than redistributing it,” he said. “From an IPO perspective, the budget improves long-term demand visibility, utilisation potential, and strategic relevance for India-based cloud and AI infrastructure providers.”
The intent of the policy is export-oriented, not to subsidise domestic cloud consumption.
“There is no tax concession on domestic cloud revenues,” Gupta told ET. “This ensures that Indian and foreign providers compete on equal terms.”
Sify declined to respond to ET's queries.
Demand for digital infrastructure fuelled by AI has unleashed a new wave of investments in India's data centre industry. Global hyperscalers and Indian conglomerates have cumulatively committed more than $70 billion investment in the next five to seven years in the domestic data centre industry, taking total capacity to about 10 gigawatts (GW) from 1 GW now.
But the new policy may lead to renegotiation of contracts between tech MNCs and infrastructure companies including Reliance Industries, AdaniConnex, Digital Connexion and Tata Consultancy Services (TCS).
Microsoft, AWS, Google, Reliance, AdaniConnex, Digital Connexion and TCS did not respond to ET's queries.
Need for revision
Local industry groupings said the policy rewards ownership of cloud platforms and intellectual property, not that of physical infrastructure, even though domestic players bear the full burden of land acquisition, electricity tariffs, grid connectivity charges and high-cost financing.
Companies have also cautioned that tax reliefs must not become a resource drain for India, as seen in countries such as Ireland and Singapore, without much value capture. For instance, in Ireland, data centres now consume around 21% of total electricity, forcing authorities to impose a moratorium on new facilities in Dublin and Greater Dublin until 2028 due to grid stress. Singapore has imposed a freeze after data centres caused a power crisis in the nation.
Among key recommendations, the BDIA has sought extension of export-linked tax incentives to Indian cloud and AI service providers, similar to the Software Technology Parks of India (STPI) model that helped build India's IT services industry. It has also called for linking tax holidays for foreign cloud firms to mandatory reinvestment—say 25-30% of profits--in India through R&D, workforce training and intellectual property creation.
It has also sought safeguards to ensure minimum domestic value addition, stronger mechanisms to prevent offshore profit shifting, and the creation of a national cloud and AI mission to support Indian companies serving global markets.
The association also recommended a “digital services equalisation mechanism” that ensures foreign cloud companies serving Indian customers through offshore billing pay a minimum effective tax rate on Indian-sourced revenue, regardless of whether they have physical presence in India.
Source: EconomicTimes
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