- Why in news
- On 14 February 2026, PIB explained the Budget 2026-27 proposal of a tax holiday till 2047 for eligible foreign cloud service providers that use India-based data centres.
- What it is
- This is a proposed income tax exemption for foreign companies that sell cloud services worldwide using data centres located in India. It sits within the income tax law and works through a notified framework with conditions. Its aim is to anchor capital-intensive digital infrastructure in India and win a share of global AI compute investment.
- Who gets it
- The foreign company must be notified, buy data centre services from an Indian company running a data centre in India, and the facility must be notified by MeitY.
- Indian customers
- Services to Indian users must go through an Indian reseller company, so domestic sales stay taxable.
- Safe harbour for data centres
- A 15 percent margin on cost is proposed where the Indian data centre is a related cost-plus entity of the foreign company.
- Unilateral APA
- A unilateral APA is an agreement between a taxpayer and the CBDT fixing in advance the price for specified transactions for a fixed period.
Don’t confuse with Safe harbour vs Advance Pricing Agreement: Safe harbour is a prescribed margin accepted without detailed checking. An APA is a negotiated agreement with the CBDT fixing the price in advance.
Don’t confuse with Tax holiday vs tax exemption on all income: Only income from global cloud operations via Indian data centres is exempt. Domestic data centre and reseller profits stay taxable.
Economy terms and data: 42 Prelims questions since 2013, rising in recent years; they test what a term or instrument means. In Mains, 12 news-triggered questions.
Why it matters
- Gives long-term tax certainty for capital-intensive data centre investment.
- Helps anchor AI and cloud infrastructure in India and links with semiconductor and electronics schemes.
Problems
- Revenue forgone for over two decades and risk of profit shifting through related-party pricing.
- Heavy power, water and land needs of data centres, and the chance that benefits go mainly to foreign firms.
Way forward
- Monitor transfer pricing and enforce the eligibility conditions strictly.
- Pair the incentive with reliable green power, skilled workforce and local value addition.
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UPSC’s own questions that come close to this issue, from our Prelims and Mains banks.
Prelims practice · Statement I and II
Ours, not from a UPSC paper
Consider the following statements about the tax holiday for foreign cloud service providers proposed in Union Budget 2026-27:
- Statement-I: A foreign cloud company can claim the proposed tax holiday only if the data centre facility it uses is notified by the Ministry of Electronics and Information Technology.
- Statement-II: Services to Indian customers must be supplied through an Indian reseller company, so that domestic transactions stay within the tax net.
Which one of the following is correct in respect of the above statements?
True or false?
1 of 5
Statements the way Prelims prints them. Say first, then see the fact.
1.The data centre facility used by the foreign provider must be notified by the Ministry of Finance.
False. The facility is notified by MeitY.
2.Under the proposal, services to Indian users by the foreign provider must be supplied through an Indian reseller company.
True. An Indian reseller entity is required for domestic services.
3.Profits of the Indian reseller from selling cloud services to Indian customers are exempt under the tax holiday.
False. Such profits remain taxable like those of any domestic company.
4.A safe harbour margin of 15 percent on cost is proposed for Indian data centres that are related cost-plus entities of the foreign company.
True. The margin is 15 percent on cost.
5.The proposal raises the safe harbour threshold for IT services from Rs 300 crore to Rs 2,000 crore.
True. The threshold rises from Rs 300 crore to Rs 2,000 crore.
Written by us from the release, not by UPSC; checked by a second model.
Mains practice
15 marks · 250 words
The Union Budget 2026-27 proposes a tax holiday till 2047 for eligible foreign cloud service providers that use India-based data centres. Examine the rationale and the conditions of this proposal. Discuss its likely benefits and the concerns it raises for India's digital infrastructure and tax base.
Worth revising until Prelims 2027: most news questions come within two years of the event.