Budget proposes higher safe harbour margin for IT firms; tax holiday for data centres

Indian IT industry received a fair share of attention in this year’s Union Budget with a slew of measures to improve growth prospects as the ongoing AI wave continues to bring changes in traditional business models.

The Finance Minister also announced aggressive incentive structure for boosting data centre space in India as data consumption grows in a rising digital economy.

For the IT services industry, the budget proposed a common safe harbour margin of 15.5 per cent. The eligibility threshold has also been raised sharply from Rs300 crore to Rs2,000 crore, which will expand the coverage to a much larger pool of companies.

Interestingly, IT-enabled services, Knowledge Process Outsourcing (KPOs) and contract Research & Development (R&D) have been put under one category- Information Technlogy Services. Such classification is likely to simplify tax rules and reduce discretionary decision-making by authorities.

“India is recognised as a global leader in software development services, IT-enabled services, knowledge process outsourcing & contract R&D services,” Finance Minister, Nirmala Sitharaman said in her budget speech.

This year’s budget also proposes measures to reduce tax litigation arising in the IT industry. The Advance Pricing Agreement (APA) process for IT services will be fast-tracked and concluded within two years, extendable by six months at the taxpayer’s request, the FM announced. In addition, associated entities of APA applicants will also be allowed to file modified returns, further easing compliance.

Tax Holiday for Data Centres: Data centre space got a major boost in this year’s budget as tax holiday announced by the FM till 2047 showed the long-term intent of the government to cash in AI-led growth.

Union finance minister Nirmala Sitharaman laid out a proposal for global cloud service providers such as Microsoft, Google and Amazon to use more Indian data centres, promising zero tax until 2047 on global cloud services provided by them through an Indian entity and from an Indian data centre.

Attracting global business and investment, recognizing the need to enable critical infrastructure and boost investment in data centres, I propose to provide tax holiday until 2047 to any foreign company that provides cloud services to customers globally, by using data centre services from India,” the FM said.

“It will however need to provide services to Indian customers through an Indian reseller entity. I also propose to provide a safe harbour of 15% on cost in case the company providing data centre services from India is a related entity.” She added.

Industry insiders welcomed the initiatives taken up by the Finance Minister.

“The Union Budget 2026-27 marks a pivotal moment in accelerating India's digital infrastructure ambitions. The extension of the tax holiday to 2047 for foreign cloud providers leveraging Indian data centre capacity is a bold, investor-attractive policy that stands out globally for its long-term horizon.

The 15% safe harbour for related-party data centre services further streamlines operations for international players building in India, reducing complexity and enhancing cost efficiency in a high-growth environment,” Pratap Mane, President & Country Head - India, Colt DCS said.