India Budget Paved Way for Tech Investment with Tax Certainty

For foreign investors considering India for cloud infrastructure services, electronics manufacturing, or other technical services, tax risk has been a significant factor weighing on the commercial opportunity. Permanent establishment exposure, profit attribution disputes, and individual tax issues complicate otherwise strong business cases.

Against the backdrop of intensifying global competition to secure and build leverage in advanced manufacturing and digital infrastructure, Budget 2026–27 signals the Indian government’s strategic intent to attract foreign capital, secure supply-chain resilience, and ensure that India is ready and remains a competitive technology hub.

Targeted Measures

Among other proposals, the three targeted measures—a tax holiday for foreign companies using Indian data centers, an exemption for nonresident suppliers of tooling to contract manufacturers of electronic goods, and a five-year relief for visiting nonresident professionals—are designed to provide incentives and tax certainty in these key sectors.

These changes are proposed to take effect from April 1, 2026, through an amendment to the Income-tax Act, 2025. Implementation depends on the passage of the Finance Bill, 2026 by Parliament and presidential assent.

Tax holiday for foreign companies using Indian data centers: India aims to become a hub for cloud computing and artificial intelligence infrastructure. The Union Budget 2026–27 furthers this goal by proposing a tax holiday until March 31, 2047, for eligible foreign companies that procure services from India-based data centers.

If an eligible foreign company procures data center services from a notified Indian operator and uses that infrastructure to serve overseas customers, the resulting global income from such operations won’t be taxed in India, subject to prescribed conditions. This exemption doesn’t apply to services provided to Indian customers, which would have to be routed through an Indian reseller to ensure that such income remains taxable in India.

This proposal is significant because it should address exposure to permanent establishment. Foreign technology companies deploying servers or infrastructure in India often have risked creating a permanent establishment under Indian law and tax treaties. For example, co-locating a server in an Indian data center can trigger tax disputes. In these cases, India can tax profits attributable to such a permanent establishment, potentially leading to disputes.

This budget proposal seeks to mitigate this risk completely and provide a significant level of tax certainty to foreign tech companies seeking to access India’s technical capabilities in this regard.

Additionally, if the Indian data center operator is a related party of the foreign company, a 15% safe-harbor margin on operating costs is proposed. This offers a predictable transfer pricing benchmark and should reduce litigation risk for long-term technology infrastructure projects.

Tax exemption for nonresident tooling and equipment suppliers: Electronics manufacturing now often uses contract manufacturing models. Foreign original equipment manufacturers frequently retain ownership of high-value tooling and capital equipment at Indian facilities.

Budget 2026–27 proposes a five-year tax holiday through tax year 2030-31 for income earned by nonresident entities supplying capital goods, equipment, or tooling to Indian contract manufacturers operating in customs bonded facilities for electronic goods manufacturing.

This is significant because foreign ownership of equipment in India, combined with technical involvement in production, has historically raised concerns about permanent establishment exposure. By expressly exempting this income, the government signals support for offshore ownership models.

A 2% safe harbor margin is also proposed for nonresident entities storing components in warehouses within customs-bonded facilities for sale to contract manufacturers, providing a low-risk framework for inventory support in the electronics supply chain.

As India expands its advanced electronics ecosystem, foreign equipment suppliers and semiconductor fabrication plant, or fab, related service providers are expected to play a central role. The exemption may ease cross-border structuring and capital deployment, which is critical as semiconductor value chains develop in India.

Five-year tax relief for nonresident individuals: Budget 2026–27 proposes targeted relief for individuals who have been nonresident in India for the past five years and now visit to provide services under specified government schemes. For these individuals, income earned outside India during their stay will be excluded from Indian taxation for five consecutive years. India-sourced income will remain taxable.

Under Indian tax law, once an individual becomes a resident, their global income may be taxed in India. For expatriates or returning professionals, this has complicated longer-term assignments. The five-year carve-out may help reduce this barrier.

The semiconductor industry, advanced electronics manufacturing, and artificial intelligence infrastructure require highly specialized global talent, including fab design engineers, process experts, and chip-equipment specialists. India’s manufacturing growth in these critical sectors depends on the temporary or medium-term deployment of foreign experts. This exemption may lower employer costs, improve predictability in cross-border mobility, and support commercially viable technical deployments.

From a policy perspective, this measure complements the data center and tooling exemptions by addressing the human capital aspect.

Coherent Strategy

Together, these proposals reflect a coherent strategy to attract capital, build supply chain resilience, and access talent, anchored in tax certainty. Data centers and equipment can be deployed in India without giving rise to the unintended consequences of a permanent establishment. Bonded warehousing and tooling can operate with predictable margins, and nonresident specialists can work without triggering immediate global taxation.

The focus isn’t only on tax incentives but also on clarity, especially regarding permanent establishment and profit attribution. For foreign investors, this clarity should be seen as more valuable than the exemptions themselves.

Long-term infrastructure and semiconductor investments require certainty over decades. By defining tax outcomes legislatively, Budget 2026–27 may align India’s tax framework with global investment cycles. In a sector where tax ambiguity can derail major investments, this shift could be one of the most significant reforms.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Aditya Singh Chandel is partner and Akshat Jain is an associate with AZB & Partners in India.

Write for Us: Author Guidelines