The Union Budget 2026 has extended a 21-year tax holiday, valid until 2047, for foreign cloud service providers that use Indian data centres to deliver cloud services to global customers through Indian reseller entities. The measure applies to companies offering cloud services outside India while leveraging domestic data centre infrastructure, and covers arrangements in which Indian entities act as commercial and operational partners for overseas cloud operators.
The provision is aimed at cloud providers using India-based data centres as part of their global delivery architecture.
21-Year Tax Holiday and Safe Harbour for Related-Party Data Centre Services
Alongside the tax holiday, the Budget introduces a safe harbour margin of 15 percent for related-party data centre services. The provision applies where the Indian data centre operator and the foreign cloud service provider are related entities.
The safe harbour framework provides certainty on transfer pricing for such arrangements and reduces compliance and audit exposure for cloud operators setting up or expanding India-based data centre operations under group structures. The policy framework, extending until 2047, is intended to cover long-term data centre investments, including facilities built to support large-scale and high-performance compute workloads.
IT Services Safe Harbour Threshold Raised Ten-Fold
Budget 2026 also revises the transfer pricing safe harbour regime for the IT services sector.
The threshold for eligibility under the safe harbour route has been raised from ₹300 crore to ₹2,000 crore, expanding coverage to a significantly larger set of companies, including mid-sized global capability centres and multinational IT operations.
In addition, multiple service categories have been consolidated into a single classification of “Information Technology Services”. The unified category covers software development services, IT-enabled services, knowledge process outsourcing and contract research and development.
A uniform safe harbour margin of 15.5 percent will apply across all services falling under this consolidated classification. The change is intended to simplify compliance for enterprises operating across multiple IT and digital service lines.
Automated Processing and Faster Advance Pricing Agreements
The Budget introduces a revised processing mechanism for safe harbour applications. Applications will now be processed through automated and rule-based systems, removing discretionary assessment by tax officers.
Once approved, taxpayers will be allowed to continue under the same safe harbour arrangement for a period of five consecutive years, at their option.
For companies opting for Advance Pricing Agreements (APAs) in the IT services segment, Budget 2026 sets a revised timeline for completion. Unilateral APAs are to be finalised within two years, compared with the current average processing time of 43 months. An optional extension of six months may be availed at the request of the taxpayer.
The modified return filing facility has also been extended to associated enterprises entering into APAs. This change allows group entities covered under an APA to align past filings with the agreed pricing framework, reducing litigation and compliance friction for multinational groups operating in India.
Conclusion
Budget 2026 introduces long-duration tax and transfer pricing certainty for cloud service providers and IT services companies through extended tax holidays, revised safe harbour margins, higher eligibility thresholds and automated processing. The measures cover cloud infrastructure operations, related-party data centre services and a unified IT services classification, while also shortening timelines for Advance Pricing Agreements and expanding dispute resolution mechanisms for multinational enterprises.
