In a significant move to bolster India's digital infrastructure, Union Finance Minister Nirmala Sitharaman has announced a tax holiday for data centres in the country, extending until 2047. This initiative is designed to capitalize on the booming demand for computing power driven by artificial intelligence (AI) technology, positioning India as a global hub for data centre investments.
Budget Proposal Details
During her Union Budget 2026-27 speech, Sitharaman outlined the specifics of this tax incentive. "Recognising the need to enable critical infrastructure and boost investment in data centres, I propose to provide tax holiday till 2047 to any foreign company that provides cloud services to customers globally by using data centre services from India," she stated. However, she added a key condition: such companies must provide services to Indian customers through an Indian reseller entity.
Additionally, the Finance Minister proposed a safe harbour provision of 15% on cost for companies providing data centre services from India if they are related entities. This measure aims to simplify tax compliance and encourage more investments in this sector.
Current Market Landscape
India's data centre market is currently valued at approximately $10 billion, with revenues of around $1.2 billion generated in FY24, according to a recent report by Anarock. Real estate firm JLL projects that India will add 795 MW of new capacity by 2027, bringing the total capacity to 1.8 GW. This growth is part of a larger trend, as private investments in AI infrastructure are expected to double from last year's $70 billion by the end of FY26, as noted by Union IT Minister Ashwini Vaishnaw.
Major Investments in the Sector
The announcement comes amid a wave of significant investments from global tech giants:
- Tata Consultancy Services plans to invest $6.5 billion over five years to build 1 gigawatt (GW) of AI-ready data centres.
- Google has announced a $15 billion investment to construct a 1GW data centre in partnership with the Adani Group.
- Microsoft is set to invest $17.5 billion in India, with a primary focus on AI data centres.
- Amazon has committed $35 billion in investments over five years, though the specific allocation for data centre expansion remains unspecified.
Importance of Data Centres for AI
Data centres play a crucial role in meeting the computing power demands of AI systems. Computing capacity, or compute, is essential for building large AI models, alongside algorithmic innovation and data sets. For smaller businesses, procuring such capacity can be challenging due to high costs, making initiatives like this tax holiday vital for fostering innovation and accessibility.
According to a research note by S&P Global from 2024, over $100 billion is expected to be invested in data centre facilities across the region over the next five years. This spending is driven by robust data growth and the rise of AI, cloud computing, and digitalization. India currently leads emerging markets with a leased data centre capacity of 1-3 GW, surpassing countries like Indonesia, Malaysia, Philippines, Thailand, and Vietnam.
Future Outlook
The tax holiday announcement is poised to accelerate India's position in the global data centre landscape. By incentivizing foreign companies, the government aims to enhance the country's computing infrastructure, support AI development, and attract further investments. This strategic move aligns with broader efforts to digitalize the economy and strengthen India's technological capabilities in the coming decades.
