The government has proposed significant tax incentives for foreign data centre service providers and extended tax benefits for companies supplying machinery and equipment to India's electronics contract manufacturing sector through the Taxation and Other Laws (Amendment) Bill, 2026.
The Bill, introduced in the Lok Sabha on Tuesday, seeks to replace the Income-tax (Amendment) Ordinance, 2026, and amend the Income-tax Act, 2025, the Finance Act, 2026, and the Payment and Settlement Systems Act, 2007.
A key proposal simplifies the tax exemption framework for foreign data centre service providers. Under the existing framework, foreign cloud companies using Indian data centres were eligible for tax exemption only after multiple layers of government approvals and notifications. The proposed legislation removes the requirement for the foreign company to be notified by the Central Government, relying instead on mandatory reporting by both the foreign cloud provider and the Indian data centre operator in a manner to be prescribed through rules.
The Bill also recognises leased facilities, allowing foreign data centre firms to operate under a lease model. Earlier, a specified data centre had to be set up under an approved scheme notified by the Ministry of Electronics and Information Technology (MeitY) and be owned and operated by an Indian company. The government said representations from industry highlighted that the ownership requirement was restrictive, as many operators lease facilities rather than own them.
The accompanying FAQs clarify that a resident company operating the data centre will continue to be taxed under the normal provisions. However, where the operator is an associated enterprise of the foreign cloud provider and is remunerated on a cost basis, a 15% safe harbour will apply for determining the arm's length remuneration.
Industry welcomed the changes, saying they would improve investment certainty.
"The revised proposal would help foreign cloud service providers and other foreign companies with workloads in India, including groups with GCC operations. Their models may involve group entities, overseas resellers, Indian reseller arrangements and cross-border customer servicing. Removing foreign company notification reduces the risk that tax certainty depends on the entity named in an approval," industry body Nasscom said.
India has witnessed a surge in investment commitments in the data centre sector. Google has announced plans to invest $15 billion over five years to establish an artificial intelligence data centre in Andhra Pradesh, while Meta has partnered with Reliance to develop a 168-MW AI data centre in Jamnagar, Gujarat.
The Bill also extends tax benefits for foreign companies supplying machinery, tooling and capital equipment to Indian electronics contract manufacturers. Under the earlier provisions, the exemption was available for five years. Citing industry feedback that the period was too short for long-term investment planning, the government has proposed extending the benefit by another 10 years, taking the total tax holiday to 15 years, up to FY2040-41.
To provide greater clarity, the Bill also specifies the electronic products covered under the tax regime, including mobile phones, laptops, personal computers, tablets, servers, and their key components and accessories.A stronger headline could be: Tax Bill eases norms for foreign data centres, extends sops for electronics manufacturing.