Finance Ministry Outlines 4 Mandatory Conditions for Foreign Cloud Firms to Claim 20-Year Tax Holiday

The Finance Ministry has clarified the eligibility criteria for the ambitious tax holiday proposed in the Union Budget 2026-27, aimed at turning India into a global hub for cloud and AI infrastructure. Under the new rules, foreign companies providing global cloud services can enjoy a tax-free status from FY 2026-27 until March 31, 2047, provided they strictly adhere to a four-point framework.

The 4 Essential Conditions for Eligibility

To ensure “tax sovereignty” and promote local business, foreign cloud giants (such as Microsoft, Google, and Amazon) must meet the following requirements:

1. Government Notification: The foreign company itself must be formally notified by the Central Government for this exemption.
2. Use of Specified Data Centres: The global firm must procure services from an Indian data centre company. This data centre must be set up under an approved government scheme and be notified by the Ministry of Electronics and Information Technology (MeitY).
3. Local Reseller Hook: Services provided to Indian users cannot be sold directly by the foreign entity. They must be delivered through an Indian reseller company (a domestic entity).
4. No Infrastructure Ownership: To qualify for the break on global income, the foreign company must not own or operate the physical infrastructure or resources of the specified Indian data centre.

Key Fiscal Safeguards

The Ministry clarified that while the foreign entity’s global income is protected from Indian taxation, domestic activities remain taxable:

• Taxable Profits: The resident Indian data centre and the Indian reseller entity will continue to pay corporate tax on their respective profits.
• Safe Harbour Margin: A 15% margin on cost has been established for cases where the Indian data centre is a related party (captive centre) of the foreign firm, helping to reduce transfer pricing disputes.
• IT Sector Simplification: The Budget has also clubbed all software, KPO, and R&D services into a single “Information Technology Services” category with a unified 15.5% safe harbour margin, raising the revenue threshold for these rules to ₹2,000 crore.

Strategic Impact

By removing the risk of global income being taxed in India simply due to the use of local servers, the government expects to attract over $200 billion in investments. Currently, India hosts only 3% of global data centre capacity despite generating 20% of global data; this policy is designed to close that gap by 2047.