Union Budget 2026 has provided sharper clarity on the taxation framework for foreign cloud service providers operating through Indian infrastructure, a move that could reshape investment dynamics in the country’s fast-growing data centre ecosystem. According to a CNBC-TV18 report, the exemption applies only to notified foreign cloud entities that meet a defined set of conditions, ensuring that the relief is narrowly targeted rather than open-ended.

Under the framework, a foreign cloud company will qualify for exemption only if it is specifically notified by the government, uses data centres located in India, secures approval from the Ministry of Electronics and Information Technology (MeitY), and routes its services through an Indian reseller. These cumulative conditions significantly limit eligibility, signalling that the policy is designed to encourage localisation without creating blanket tax arbitrage.

What is changing is the level of certainty around tax exposure. The Budget explicitly clarifies that there will be no risk of global income of eligible foreign cloud companies being taxed in India merely because they use Indian data centres. This addresses a long-standing concern among global cloud providers about unintended permanent establishment risks arising from localisation.

At the same time, the framework preserves India’s domestic tax base. Indian data centre operators and Indian resellers will continue to be taxed as domestic entities under existing laws. In addition, a 15% safe harbour has been specified for related-party data centre transactions, offering a benchmark for transfer pricing while limiting aggressive profit shifting. This balance between incentive and protection underscores a calibrated policy approach rather than a concession-heavy one.

Why this matters for India is tied to scale. Data centre capacity has expanded rapidly over the last few years, but utilisation and long-term viability depend on sustained demand from global cloud players. Clear tax rules reduce uncertainty, improving India’s competitiveness as a location for hyperscale and enterprise cloud infrastructure, especially as companies diversify capacity away from a few global hubs.

For listed companies with exposure to the data centre and cloud infrastructure theme, the announcement has near-term sentiment implications. Netweb Technologies India, which supplies high-performance computing systems and servers used in data centre environments, stands to benefit indirectly if cloud localisation drives higher domestic infrastructure spending. Similarly, Anant Raj Limited, which has been investing in large-scale data centre projects, gains from improved policy visibility that could accelerate tenant onboarding and capacity commitments.

From a policy standpoint, the design avoids a key risk: erosion of tax revenues through routing of global income. By clearly stating that only specified income streams are exempt and that Indian entities remain taxable, the government has attempted to align foreign investment incentives with fiscal discipline. The requirement for MeitY approval also introduces a gatekeeping mechanism, allowing the government to retain oversight over strategic digital infrastructure.

Market Impact on India

The clarification is supportive for market sentiment around the data centre and digital infrastructure theme. It reduces regulatory overhang, which has been a concern for long-gestation infrastructure assets. For broader markets, the move reinforces the Budget’s narrative of targeted incentives rather than broad tax giveaways.

Sector Impact

The immediate impact is positive for the technology infrastructure and real estate-linked data centre sector. Equipment suppliers, power infrastructure providers and network service firms may also benefit as clearer tax rules encourage capacity expansion by global cloud players.

Bull vs Bear Scenario

The bullish case is that clearer taxation and safe harbour rules accelerate commitments from global cloud providers, improving utilisation rates for Indian data centres and driving follow-on investment across the ecosystem.

The bearish view is that the narrow eligibility criteria could limit actual uptake, with benefits accruing only to a handful of players while broader sector growth remains dependent on global demand cycles.

Risk Section

Key risks include delays in notification or approval processes, ambiguity in implementation, and potential changes in global tax norms that could alter cross-border cloud economics. Any tightening of localisation or compliance requirements could also temper investment enthusiasm.

Overall, Budget 2026’s cloud tax framework offers clarity without dilution, strengthening India’s proposition as a data centre hub while keeping domestic taxation firmly intact.