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Changes to the safe harbour regime that finance minister Nirmala Sitharaman proposed Sunday are expected to offer improved tax certainty for the IT and technology sector, as well as reduce disputes over transfer pricing and ease compliance burden. The announcement of a 20-year tax holiday for foreign data centre investments, meanwhile, signals that India is ready to host AI infrastructure at global scale, said industry experts.
Safe harbour is a legal provision that reduces or eliminates liability for individuals and businesses if they meet predefined conditions. The budget proposes to raise the turnover threshold to qualify under this for IT services providers to Rs 2,000 crore from Rs 300 crore now. It also announced a uniform safe harbour operating profit margin of 15.5%—if a company’s margin is up to this level while servicing its foreign group, the pricing will be treated as acceptable and won’t be questioned. The minister announced clubbing industry verticals such as software development services, IT enabled services, knowledge process outsourcing and contract R&D services relating to software development under a common head of IT. The safe harbour margins for these verticals currently range from 17% to 18%
Another proposal is on setting up an Education-to-Employment Enterprises standing committee to help strengthen the IT services sector with an aim to capture 10% of the global market share by 2047.
"Long term tax certainty and safe harbour provisions address a core requirement for digital infrastructure—predictability—at a time when AI workloads are expanding rapidly,” said Microsoft India & South Asia president Puneet Chandok.
The finance minister had indicated in earlier budget speeches that the government was reviewing the safe harbor framework. In an interim notification last March, the government increased the eligibility threshold to Rs 300 crore from Rs 200 crore. Software lobby group Nasscom had been seeking a minimum Rs 2,000 crore.
Ashish Aggarwal, vice-president of policy of Nasscom, said the budget move would improve ease of doing business, reduce dispute costs and free administrative capacity to focus on genuinely higher risk cases. “Importantly, it supports India’s growth priorities by making the country a more attractive base for global delivery and capability centres,” he said.
Sameer Gupta, national tax leader at EY said by collapsing different service categories into a single IT services bucket, and offering a uniform margin, the government has effectively eliminated a major source of friction.
The tax holiday for data centres comes with a proposal to put a 15% safe harbour on the cost when the services are provided by a related entity of a foreign cloud firm.
“Cloud, AI and digital infrastructure are long-term, capital-intensive foundations,” said Raju Vegesna, chairman and managing director of Sify Technologies. “You cannot build this thinking five years ahead—you need to think 20 or 30 years ahead. A tax holiday till 2047 gives exactly that confidence.”
India cannot become the third-largest economy without investments in digital infrastructure, he said. “With this policy, India can become the lowest-cost, highest-scale destination for cloud and AI services serving the world.”
The announcement comes at a time when India is witnessing some of the largest data centre investments globally. Cloud computing giants such as Google, Microsoft and Amazon Web Services, and Indian conglomerates like Reliance Industries, Adani Group, Tata and L&T are set to together invest more than $70 billion in the next five-seven years in the domestic data-centre industry, taking total capacity to about 10 gigawatts from one GW now.
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Another proposal is on setting up an Education-to-Employment Enterprises standing committee to help strengthen the IT services sector with an aim to capture 10% of the global market share by 2047.
"Long term tax certainty and safe harbour provisions address a core requirement for digital infrastructure—predictability—at a time when AI workloads are expanding rapidly,” said Microsoft India & South Asia president Puneet Chandok.
The finance minister had indicated in earlier budget speeches that the government was reviewing the safe harbor framework. In an interim notification last March, the government increased the eligibility threshold to Rs 300 crore from Rs 200 crore. Software lobby group Nasscom had been seeking a minimum Rs 2,000 crore.
Ashish Aggarwal, vice-president of policy of Nasscom, said the budget move would improve ease of doing business, reduce dispute costs and free administrative capacity to focus on genuinely higher risk cases. “Importantly, it supports India’s growth priorities by making the country a more attractive base for global delivery and capability centres,” he said.
Sameer Gupta, national tax leader at EY said by collapsing different service categories into a single IT services bucket, and offering a uniform margin, the government has effectively eliminated a major source of friction.
The tax holiday for data centres comes with a proposal to put a 15% safe harbour on the cost when the services are provided by a related entity of a foreign cloud firm.
“Cloud, AI and digital infrastructure are long-term, capital-intensive foundations,” said Raju Vegesna, chairman and managing director of Sify Technologies. “You cannot build this thinking five years ahead—you need to think 20 or 30 years ahead. A tax holiday till 2047 gives exactly that confidence.”
India cannot become the third-largest economy without investments in digital infrastructure, he said. “With this policy, India can become the lowest-cost, highest-scale destination for cloud and AI services serving the world.”
The announcement comes at a time when India is witnessing some of the largest data centre investments globally. Cloud computing giants such as Google, Microsoft and Amazon Web Services, and Indian conglomerates like Reliance Industries, Adani Group, Tata and L&T are set to together invest more than $70 billion in the next five-seven years in the domestic data-centre industry, taking total capacity to about 10 gigawatts from one GW now.
