India is taking significant steps to attract global investment in artificial intelligence (AI) by implementing a tax exemption strategy aimed at foreign cloud service providers. Announced by Finance Minister Nirmala Sitharaman in the annual budget, the initiative promises a tax holiday until 2047 for services sold outside India, provided they operate from local data centers.
This tax incentive is positioned as a move to bolster India’s profile in the rapidly evolving global AI landscape, even as the nation faces challenges related to power shortages and water scarcity. Sales to Indian customers, however, will still be taxed domestically and must be routed through local resellers.
Key highlights of the budget include:
– A 15% cost-plus safe harbor for Indian data center operators working with foreign affiliates.
– U.S. tech giants, including Amazon, Google, and Microsoft, are increasingly viewing India as a fertile ground for AI investments.
– Google’s commitment of $15 billion marks a substantial investment in building AI infrastructure, while Microsoft has pledged $17.5 billion by 2029 for similar initiatives.
– A burgeoning domestic sector is also stepping up, with Digital Connexion planning an $11 billion AI-focused data center in Andhra Pradesh.
However, these ambitious plans may be hampered by infrastructural challenges, particularly inconsistent power supply and high electricity costs. Experts like Rohit Kumar of The Quantum Hub note that while the incentives position data centers as critical business sectors, operational hurdles could slow growth and raise expenses.
Looking ahead, India’s data center capacity is expected to escalate significantly, climbing to over 2 gigawatts by 2026 and potentially exceeding 8 gigawatts by 2030, according to projections by Future Shift Labs.
In addition to AI infrastructure, the budget emphasizes expanding India’s role in electronics and semiconductor manufacturing, signaling a shift from assembly to more value-added processes. The government has announced plans to enhance the Electronics Components Manufacturing Scheme and to support states in developing rare-earth mineral corridors.
Moreover, a move to simplify cross-border e-commerce is designed to empower small businesses and artisans by removing the ₹1 million ($11,000) cap on overseas courier exports, thereby facilitating greater global market access.
As India seeks to solidify its status as a global hub for technology and innovation, success will depend on its ability to address existing resource constraints and sustain a conducive environment for digital infrastructure growth.
