Budget 2026: Industry seeks reduction in data centre related tax and regulatory uncertainties

India has seen mega investment announcements by the Big Tech firms Google, Microsoft and Amazon, and there is a rush to build cloud and AI infrastructure. The industry bodies representing these firms and data centre operators have sought for more favourable tax and regulatory measures that would ensure long-term policy certainty.  

The three Big Tech firms alone have announced investments worth $70 billion in India in the last few months. These firms have made several representations to the government  to clearly spell out whether data centres are attributed by tax authorities as ‘permanent establishment' for the cloud service providers (CSP).

“Standard hosting and colocation services provided by Indian data centre operators to foreign cloud service providers are increasingly being examined as if they create a fixed place permanent establishment of the foreign CSP. This creates double taxation risk and profit attribution disputes even when the Indian data centre operator is already taxed in India on arm’s length margins,” says Ashish Aggarwal, Vice President and Head of Public Policy, Nasscom.

Nasscom (National Association of Software and Service Companies) has sought a clear statutory clarification that procuring hosting or colocation services from an Indian data centre operator does not create business connection or permanent establishment for the foreign CSP when the Indian operator is remunerated at arm’s length, according to Aggarwal.

The industry body has also requested the government to align the meaning of “permanent establishment” in domestic law with tax treaties. Generally, permanent establishments are defined in tax treaties, and it is not really coded in the domestic law itself. 

“Putting a clear framework will help to make sure that there's clarity, and that clarity should ideally encourage, encourage more investment. And that clarity should be, more importantly, tax neutral,” says Aggarwal. 

Tax incentives 

Assocham (Associated Chambers of Commerce and Industry of India) has also sought a series of tax related incentives for data centres. 

“Data centres are capex intensive, and yet the current GST system blocks inputs tax credit on civil construction and immovable property. This impacts project costs and affects global competitiveness,” says Sunil Gupta, MD and CEO of  Yotta Data Centre Services, who chairs 

Assocham’s data centre and AI council and task force.  

The industry body has sought full GST input credit on data centre construction, including civil work, power systems, design, engineering, project management, and consultancy services. It has also sought profit linked income tax deductions. 

The body has also asked the government to incentivise renewable powered data centres and rationalise energy charges. It has sought eligibility for green data centres for sovereign green bond financing and sustainability linked funding. 

Energy rationalisation

With respect to rationalisation of renewable power, Assocham has asked for redesigning of ISTS (inter-state transmission system) charge waivers with lower capacity thresholds, reduction of wheeling charges, and allowing banking of renewable power for data centre parks. 

ISTS charges are the fees paid for using the national electricity transmission network to move power from one state to another.

The industry body has also requested the government to increase the budget of IndiaAI compute from Rs 10,000 crore to upwards of Rs 40,000 crore to “reflect real demand for sovereign model and AI use cases”.

It has also suggested extending mission support beyond model training to cover early-stage inferencing and adoption, especially for public good applications.

India’s operational data centre stock reached ~1,530 MW (MW is the IT power consumed by data centres), as of January-September 2025, with 260 MW of new supply added during the year, according to CBRE. This will grow to 8GW by 2030, KPMG said in a report last month.