Building The World's Back-End: How Union Budget 2026-2027 Accelerates India's Global Cloud And Data Centre Infrastructure Leadership

Executive Summary

India's data centre and cloud infrastructure sector is experiencing unprecedented growth, driven by explosive data generation, digital transformation across industries, and fiscal incentives introduced in the Union Budget 2026. India generates approximately 20% of global data yet hosts only 5.5% of global data center capacity, creating a significant demand-supply gap and compelling investment opportunity.

The 21-year tax holiday, in effect until 2047, for foreign companies using Indian data centres, combined with rationalised transfer pricing frameworks and automated safe-harbour provisions, has fundamentally altered the risk-return calculus for global investors. With projected capacity expansion from ~1.35 GW to ~8 GW by 2030 requiring USD 30 billion in investment, the sector presents a once-in-generation opportunity for domestic and international players.

Union Budget 2026: Transformative Policy Framework

Key Proposed Fiscal Incentives

1. Tax Holiday until 2047: It is proposed that any foreign companies that provide global services out of India It is proposed that any foreign company using data centre services located in India to deliver services to customers outside the country be granted a tax holiday until 2047. However, it is subject to the following conditions:

1. Services to global customers can be provided directly from Indian data centers without triggering Indian corporate tax.
2. Services to Indian customers must be routed through an Indian reseller entity.
3. Exemption applies to income accruing or arising in India through procurement of services from specified data centers.

Business Impact: This provision materially lowers India tax risk on global operations and accelerates multibillion-dollar investment decisions into local data center infrastructure. Foreign cloud providers can centralise global cloud revenues outside India while routing compute workloads through Indian data centers without triggering Indian corporate tax on offshore income for 21 years.

2. Rationalised Advance Pricing Agreement (APA) Framework: Modified return filing under APA provisions extended to associated entities of the APA signatory, not just the primary entity.

Proposed Changes:

• To fast-track the Unilateral Advance Pricing Agreement (APA) process for IT services companies, with a target to conclude such APAs within two years.
• It is proposed that this two-year period may be extended by an additional six months upon the taxpayer's request.
• It is proposed to extend the existing facility—where an entity entering into an APA can file modified returns in accordance with the agreement—to its associated enterprises as well.
• It is proposed that associated enterprises be allowed this facility specifically in cases where their income is also affected due to the APA.

Business Implications for Multinational Companies:

• Faster Certainty on Transfer Pricing Outcomes: A fasttracked Unilateral APA process (completed in ~2 years) means MNCs get quicker clarity on how their IT service transactions will be priced for tax purposes. Faster certainty reduces disputes, audits, and longrunning litigation.
• Lower Tax Risk Across Group Entities: Extending the modified return facility to associated enterprises ensures that all affected entities can align their tax filings with the APA. This reduces the risk of:
  • Double taxation;
  • Mismatched income;
  • Inconsistencies across jurisdictions
• Simpler Compliance for Global Groups: When both the main entity and related entities can revise returns, MNCs avoid complicated adjustments or reconciliations later. This supports cleaner, more transparent transfer pricing compliance globally.
• Improved Cash Flow Planning: Earlier APA resolution helps companies predict:
  • Future tax liabilities;
  • Required provisions;
  • Repatriation planning.

Reduced uncertainty improves cash flow management and budgeting.

• More Attractive Environment for Foreign Investment: A predictable, time-bound APA process makes India (especially the IT services sector) more attractive for global groups looking to scale operations. MNCs value certainty + speed in tax regimes.
• Reduced Administrative Burden: With both main and associated entities allowed to file modified returns:
  • Documentation becomes more streamlined;
  • Internal adjustments become easier
  • Fewer retrospective disputes arise
• Avoidance of Double Taxation: If related entities abroad adjust their income based on the APA, MNCs avoid the classic problem of being taxed twice for the same income.

3. Safe Harbor for IT Services: It is proposed to introduce a consolidated "Information Technology Services" category with a uniform 15.5% safe‑harbor margin, covering software development, IT‑enabled services (ITeS), knowledge process outsourcing (KPO), and contract R&D services.

Key Features:

1. Threshold raised from INR 300 Crore to INR 2,000 Crore
2. Automated, rule-driven approval process without tax officer review
3. Renewable for 5 years at company's choice
4. Effective from April 1, 2026

Business Impact: IT firms can opt into a standard safe harbor margin for up to five years, lowering audits and litigation risk. This especially benefits SMEs and reduces unpredictable tax assessments. For multinational cloud groups, it lowers litigation risk on related-party data center services, supporting aggressive intra-group migration of workloads to India.

Existing Stock vs Supply Pipeline of Data Centres in India

Existing Stock

India's data centre landscape continues to expand, with an operational capacity of 1,280 MW and a colocation vacancy rate of 18.7%. The country currently hosts 130 data centres, reflecting a mix of colocation facilities and hyperscaler cloud service providers. Despite this growth, India accounts for only about 5.5% of global data center capacity while generating around 20% of global data, highlighting a pronounced demand-supply mismatch.

Supply Pipeline

A pan‑India upcoming supply of 2,887 MW is expected by 2030, comprising both colocation (colo) capacity and greenfield developments led by hyperscale cloud service providers. This projected supply includes 638 MW currently under construction and an additional 2,249 MW in the planned pipeline, reflecting the strong investment momentum and expanding digital infrastructure demand across the country. Cumulative announced new capacity exceeds 5 GW, with major players including NTT, STT GDC, CtrlS, Nxtra, Yotta, Adani Connex, and Reliance.

City-Level Beneficiaries in India

Strategic Investment Rationale: Why Foreign Companies Must Invest Now

1. Explosive Market Growth with Structural Depth: India's public cloud market expands at 24-25% CAGR, projected to reach USD 17.8 billion by 2027 and potentially USD 192 billion by 2033. This growth is structurally underpinned by enterprise digitisation, SaaS adoption, and multi-cloud strategies across BFSI, manufacturing, and government.

2. Policy Stability and Tax Certainty: The 2026 Budget provides an unusually long-dated tax holiday to 2047 for foreign cloud companies using Indian data centers to serve non-resident customers, together with clear safe-harbor and APA regime. This combination sharply reduces fiscal and dispute risk for locating servers, storage, and AI training capacity in India.

3. First-Mover Advantage: Investors entering now secure economics, locations, and regulatory certainty that late entrants will not obtain.

4. Domestic and Export Market Access: India offers a large and under-penetrated domestic customer base (SMEs, government agencies, traditional industries adopting cloud) while the tax-holiday design positions India as a regional export hub for cloud services to Asia, Africa, and Europe without incremental Indian tax drag on offshore revenues.

5. Complementary Capabilities in Talent and Hardware: India's deep pool of cloud-literate developers and engineers, along with ISM 2.0 and ECMS initiatives, creates a unique talent-plus-hardware proposition. Hyperscalers can colocate engineering, operations, and increasingly hardware design and assembly near major cloud regions. India becomes not just a large customer market but also an efficient global production base for cloud infrastructure and related services.

6. Demand-Supply Mismatch as Immediate Opportunity: India generates 20% of global data but hosts only 5.5% of global data center capacity. Occupancy levels near 97% indicate near-full utilisation. This structural undersupply, combined with 21-year tax certainty, creates a rare investment window.

Future Outlook and Trends

• AI-Driven Infrastructure Transformation: AI workloads accounted for approximately 25% of total data center workloads in 2025, largely driven by model training. From 2027, inference is likely to emerge as the dominant AI workload, and by 2030, AI could represent nearly half of all data center demand.
• Infrastructure Implications:
  • Need for high-density, GPU-optimised facilities.
  • Advanced cooling systems for AI training clusters.
  • Low-latency interconnects for distributed inference.
  • Specialised power delivery systems.
• Edge Computing Proliferation: Beyond Tier-I cities, future supply expansion into secondary and edge markets will support latency-sensitive workloads such as autonomous vehicles, IoT, and real-time analytics.
• Sustainability as Competitive Differentiator: Availability of low-carbon electricity at scale will become a competitive differentiator for India as a cloud infrastructure hub, especially for energy-intensive AI training workloads. State policies increasingly tie financial incentives to green energy usage.
• Global Investment Supercycle: Total investment in the global data centre sector expected to reach USD 3 Trillion by 2030. Rollout of approximately 100 GW of new capacity globally between 2026 and 2030 could generate around USD 1.2 trillion in real estate asset value, with customers investing an additional USD 1-2 trillion in servers, networking hardware, and IT infrastructure.

Conclusion

India's data center and cloud infrastructure sector stands at an inflection point. The convergence of explosive demand growth, landmark fiscal incentives providing 21-year tax certainty, structural supply deficit, and complementary ecosystem capabilities in talent and hardware manufacturing creates a compelling multi-decade investment thesis. Policy risk, historically the biggest concern for foreign investors, has materially reduced with the Union Budget 2026's codified tax holiday, rationalised transfer pricing frameworks, and automated safe-harbour provisions. India has moved from optionality to necessity for global cloud infrastructure strategies. The question is no longer whether to invest in India's data centre sector, but how quickly to secure strategic locations, power access, and regulatory approvals before the investment window narrows. Those who enter now will define the sector's architecture for the next two decades.

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