India Data Center Safe Harbor Shows US States Must Stop Handouts

India’s 20-year tax holiday for global data centers grabbed headlines earlier this month. And, for good reason, as a two-decade exemption is a powerful incentive even in a vacuum. But the bigger story may be the one buried alongside it: a 15% safe harbor for transfer pricing on those same data services.

This move signals a shift in the global digital infrastructure competition that US states are about to lose—badly. India is saying “centralize your artificial intelligence and cloud operations here, and we’ll guarantee your tax math for the next two decades.” No audits, no drawn-out litigation, no guesswork. The tax holiday garners attention; the safe harbor makes the promise workable.

This is more than a niche tax reform oceans away—it’s about to leave a mark stateside. Unless US states rethink their data center strategies, they’ll be subsidizing server farms that will ultimately pull up stakes after India builds the backbone of the global digital economy.

The policy one-two punch of a tax exemption on overseas services and transfer pricing safe harbor amounts to a finely tuned invitation to multinational corporations to centralize their AI and cloud operations in India. It solves for them what could otherwise be a transfer pricing headache that, left unresolved, would otherwise undermine even generous tax incentives.

When an Indian affiliate of a multinational—say, for instance, Microsoft India—provides services to its US parent, Indian tax authorities want to ensure that the Indian entity charges a fair arm’s-length price. If not, the government may claim the Indian entity undercharged, demand a transfer pricing adjustment, and hit the domestic entity with a retroactive tax bill. These fights can drag on for years.

The safe harbor is an end-around for all of that. If companies apply a 15% markup on its costs, the Indian government agrees not to question the price. That provides multinationals with certainty, speed, and a tax environment where their financial modeling can reflect reality. In other words, it is the mechanism by which a tax holiday is turned into a firm policy commitment that fits on a balance sheet. That will be especially valuable for data centers supporting AI and cloud services worldwide.

While India is offering multinational cloud providers tax certainty for decades, US states are flinging subsidies at data center development like they’re bidding on a stadium project. Local officials cut property taxes, adjust zoning restrictions, and waive utility fees—often without ensuring the same value flows back to the public after the ribbon-cutting ceremony.

Setting aside whether public handouts for private data center development is sound policy, the US states are acting without a unified strategy. They can’t offer any safe harbor rules, and they don’t have a clear way to price the value of their handouts. It amounts to fiscal policy by improv, and there are new shows happening regularly at your local town council.

The lesson here isn’t for India; it’s for the US states that will likely soon scramble to try to match its momentum.

Photographer: Dhiraj Singh/Bloomberg via Getty Images

Unlike India, US states offer uncertainty in all directions. There can be no unified policy on transfer pricing, grid access is dependent on continued investment in local infrastructure, and the availability of a local workforce may depend on who wins the next statewide election.

For the states, the long-term payoff has never been great. Data centers create a flurry of construction jobs, then settle into a quiet hum of 24/7 servers, a few full-time employees, and massive electric and water bills. Meanwhile, taxpayers must shoulder the burden of upgraded roads, emergency services, and utility infrastructure rollouts—without getting a piece of the infrastructure in return.

India is offering pre-cleared pricing rules and alignment across national agencies. That’s what it looks like when a country wants to become a global infrastructure platform.

US states, by contrast, are acting more like competitive landlords in a tenant market. They’re handing out incentives without guardrails or clawbacks, negotiating in isolation, and hoping their policies attract a large data center operator.

Without a strategic reset, this won’t just be a bad deal—it’ll be a policy rout. And US taxpayers will be left footing the bill for someone else’s global expansion.

The lesson here isn’t for India; it’s for the US states that will likely soon scramble to try to match its momentum. They probably can’t, and likely shouldn’t, try to beat India on its own terms. The worst-kept secret in economic development is that data center subsidies have always been a shaky bet. They front-load job creation but produce minimal long-term employment, and quietly inflate local infrastructure costs.

States need to shift their strategy to stay in the game. If they’re going to offer incentives anyway—for political reasons or otherwise—they should at least demand something durable in return. That means no more blank-check incentives.

Tax breaks must be conditioned on concrete and enforceable infrastructure commitments such as grid upgrades, broadband buildout, and hard asset concession that create durable public value. If a company wants 20 years of tax relief, it should deliver 20 years of guaranteed energy, connectivity, or compute capacity that the public can use.

States should coordinate—regionally, if the federal government isn’t interested in getting involved—to avoid racing each other to the bottom while India races to the top.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social.

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