By Ritika Loganey Gupta
India’s push toward digital transformation is accelerating demand for robust data infrastructure, positioning data centres as critical enablers of economic growth. With rising internet penetration, 5G expansion, and surging AI adoption, India stands poised to become a global data hub. However, structural bottlenecks—ranging from regulatory fragmentation to taxation and power access—threaten to undermine this momentum.
The Centre’s Digital India mission, the Digital Personal Data Protection (DPDP) Act 2023, and the Draft National Data Centre Policy lay encouraging groundwork for long-term digital sovereignty and investor confidence. At the state level, incentives such as stamp duty waivers, capital subsidies, electricity duty exemptions, and dedicated subsidies for renewable energy use highlight proactive steps to attract investment.
What India now needs is a unified, pan-India strategy that harmonises clearances, tax regimes, and infrastructure support to ensure scalable, resilient, and competitive growth in its data centre ecosystem.
Reforming Taxation for Global Competitiveness
One of the most pressing areas for reform is taxation. Global firms keen to invest in Indian data infrastructure often face uncertainty around the “Permanent Establishment” (PE) status due to the presence of servers. Though recent legal interpretations have offered some clarity, a more predictable and investor-friendly tax framework aligned with international norms would go a long way in encouraging cross-border investments.
Clarifying GST Rules for Data Centres
Within India, the Goods and Services Tax (GST) regime has brought uniformity to many sectors, but for data centres, several ambiguities persist. Questions around service classifications—whether data storage, colocation, or cloud services—create compliance burdens. Most significantly, the current rules disallow input tax credit (ITC) on construction-related expenses. Considering the high capital investment required to build data centres, enabling ITC for construction would provide a major boost to project viability and investor interest.
Establishing Data Centres in a Special Economic Zone (SEZ)
Setting up a data centre in a SEZ confers multiple strategic advantages. Under the SEZ Act, entities enjoy duty-free imports and domestic procurement of servers, networking, and other equipment. These measures substantially lower the effective costs of setting up and operationalising data centres.
Enabling Efficient and Sustainable Operations
On the operational front, challenges remain—but so do opportunities. Power reliability and last-mile connectivity are essential, especially as growth moves beyond Tier-1 cities. Investing in renewable energy solutions can not only reduce costs over time but also align the sector with India’s sustainability goals. This is a chance to set global benchmarks in building green, energy-efficient data centres.
Bridging the Talent Gap
Equally important is the need to address the talent gap. As demand for digital infrastructure grows, so does the need for skilled professionals in areas such as network management, cybersecurity, and facilities operations. Public-private partnerships with educational institutions can help create a robust talent pipeline. Training programmes and certifications tailored to the sector’s needs will ensure that India not only builds the infrastructure but also develops the human capital to manage and secure it.
Boosting Local Manufacturing Through ‘Make in India’
Aligning the data centre strategy with the broader Make in India initiative presents another valuable opportunity. Promoting local manufacturing of IT and server equipment can reduce import dependencies, improve cost structures, and simplify tax and compliance processes. A thriving domestic hardware ecosystem would further strengthen India’s digital self-reliance.
The Road Ahead
The road ahead is not just clear—it is transformative. With accelerating demand, supportive policy momentum, and surging investor confidence, India stands on the brink of becoming a global hub for digital infrastructure. As AI, edge computing, and sustainable data centres redefine the landscape, sectors such as fintech, healthtech, and e-governance will unlock unprecedented growth. With strategic reforms and unified execution, India can architect a resilient data economy that powers its digital future for generations to come.
- Prateek Kukreja, Senior Tax Professional also contributed to the article.
(Ritika Loganey Gupta, Tax Partner, EY India.)
Views are personal and do not represent the stand of this publication.
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