Leading US tech giants seeking direct tax sops to expand data centers in India

Officials said the government is mulling to dispense additional sweeteners - excluding direct taxes - to nudge the tech companies to establish more data centers in Tier II and Tier III cities of India.

Leading US-based technology companies including Google, Microsoft, Amazon and others have in recent months approached the Indian government seeking direct-tax incentives to set up more data centers, a request that is currently being discussed, government officials have told Moneycontrol.

The tech majors have expressed willingness to expand their data centers capacity across India, and have sought tax holidays on the income generate from those centres for a period of time, Moneycontrol has learnt. Some companies are seeking a concessional corporate tax rate of 15% on that income.

Two government officials familiar with the development said that the Centre, however, does not wish to provide any direct tax incentives as the states are already dispensing many sweeteners. "We’re not in favour of providing any tax holiday, or a lower corporate tax rate, for any data center capacity expansion. The 15% tax regime was discontinued from FY25, we don’t wish to bring it back," said one official.

"However, this is being discussed at the moment. The government does want localisation of data, and is willing to do all that is possible from the policy perspective," another person said.

Andhra Pradesh Chief Minister Chandrababu Naidu had recently told the Central government that the current tax laws discourage foreign cloud service providers (CSPs) from investing in India. Naidu suggested amending Section 9(1) of the Income Tax Act to clarify that Indian data center affiliates do not constitute a permanent establishment (PE) for foreign cloud service providers. This change would reduce tax burdens of such companies, and thereby encourage foreign investment in India's data infrastructure, experts have said.

Read More: Blackstone CEO Schwarzman bullish on India's data center segment

India’s data localization regime combines economy-wide privacy laws and sectoral rules to require certain data to be stored - and sometimes processed - within India. Under the Digital Personal Data Protection Act (2023), cross-border transfers are generally permitted except to blacklisted nations, but the government or sectoral regulators (such as RBI) can mandate onshore storage for ‘critical’ or ‘sensitive’ data.

The RBI’s 2018 Master Direction already compels payment-system operators to store full datasets - including logs and audit trails - in India, even if processing occurs abroad.

To comply, Google and other US cloud providers have established dedicated ‘regions’ in India. Google has formed a local entity and is building a hyperscale campus near Mumbai, complete with regional storage clusters, in-country encryption key management and strict data-egress controls.

Microsoft currently operates data centre regions in Pune, Chennai, and Mumbai, and is building the fourth one in Hyderabad. In January 2025, the company’s CEO Satya Nadella had announced that Microsoft plans to invest $3 billion in India in cloud and AI infrastructure and skilling over the next two years, including the establishment of new data centers.

At present, the data-center projects attract significant state incentives. Maharashtra, for instance, treats them as ‘essential services’, granting up to 10 years of GST exemptions, stamp duty waivers, subsidized power, and accelerated clearances. Karnataka and Tamil Nadu offer capex subsidies of around 20-25 percent, uninterrupted power guarantees, easier building norms, while Odisha and Punjab support employment through hiring incentives and tax reimbursements.

Officials said the government is mulling to dispense additional sweeteners  - excluding direct taxes - to nudge the tech companies to establish more data centers in Tier II and Tier III cities of India.

Experts say that given the high capital intensity, long gestation periods, and global competition for establishing data centres, targeted fiscal incentives - such as tax holidays, depreciation benefits, and infra support - are justified to catalyse investment and position India as a global data hub.

“India is poised to become a global data centre powerhouse, with the market expected to reach $10.70 billion by 2030. Strategic fiscal incentives like tax holidays, accelerated depreciation, and SEZ-linked benefits are crucial to unlocking cost efficiencies, attracting significant investments, and solidifying India's position in the global digital economy,” said Ritika Loganey Gupta, Tax Partner, EY India.

Sivakumar Ramjee, Executive Director, Nangia Andersen said, “By granting infrastructure status, facilitating dual power grids, and offering land at concessional rates, the states strategically positioning themselves as key nodes in the global data network. This sub-national policy push, combined with the central government’s broader digital vision, has the potential to transform India into a preferred destination for hyperscale and AI-driven data centers in Asia.”

Many countries across the world offer a range of tax incentives to attract data center investments. These incentives typically include reduced corporate income tax rates, exemptions from various taxes, and investment-based tax credits. For instance, Brazil provides tax breaks on IT equipment purchases for data centers.

In the United States, states such as Georgia and Michigan offer incentives like sales tax exemptions, property tax abatements, and income tax credits. Similarly, countries like Romania, Saudi Arabia, and Singapore extend tax benefits to data centers, often as part of broader strategies to support the IT sector and digital economy.