For the better part of a decade, India has been the world"s back office, but now it looks like it is heading into a new direction. As part of the country"s Union Budget for this year, the Indian government announced a sweeping tax holiday for foreign data center operators, provided they are servicing customers located outside India.
This means that cloud providers like AWS, Microsoft Azure, and Google Cloud will be able to serve global customers and earn revenue without paying a cent in Indian taxes. There are, of course, guardrails.
To protect the domestic tax base, these foreign giants must route services for Indian customers through a local reseller entity, which will be taxed as usual. But most power-hungry tasks, such as training AI models, inference, and serving customers outside India, would essentially become tax-free.
Historically, multinational companies have been hesitant to put too many assets in India because of tax disputes. The government would often disagree with companies on how much tax they owed, leading to years of court battles. This new policy addresses that head-on with something called a "Safe Harbour", where the government has set a fixed operating margin of 15% for these transfer pricing calculations between a company"s Indian and foreign entity. This acts as a pre-signed peace treaty, where, as long as companies declare this 15% margin, the government promises to accept it without scrutiny.
There has been an increasing shortage in the global data center market for compute, as AI models are increasingly becoming popular and more and more workloads are now dependent on them. Traditional hubs like Virginia, Singapore, and Ireland are facing severe constraints on power and land.
However, the move is unlikely to create a massive employment boom in the country. Unlike the smartphone assembly lines by Apple and Foxconn that employ tens of thousands of workers, data centers are notoriously capital-intensive but labor-light.
This isn"t the first time India has lured big tech data centers. Microsoft and Amazon, both, have set up multibillion-dollar data center operations in the country. Google is also playing catch-up in terms of physical footprint and announced a data center that will be built in the Indian coastal city of Visakhapatnam.