India’s Data Centre Tax Holiday Could Hurt Its Own Cloud Startups

India’s proposal to grant a 20-year tax holiday to foreign companies providing global cloud services from data centres in the country could reshape competition in the cloud market, putting pressure on Indian cloud startups.

Announced in the Union Budget 2026–27, the tax holiday seeks to attract global cloud providers to build infrastructure in India. The tax incentive could remain in effect until 2047.

The move is expected to boost data centre investments and strengthen India’s digital infrastructure. However, some domestic cloud startups say it could also create an uneven competitive environment if similar incentives are not extended to Indian companies.

Over the past few years, a new generation of Indian neo-cloud providers has emerged. These companies aim to build alternatives to traditional hyperscaler platforms by offering AI-focused infrastructure, GPU clusters, developer-centric tools and flexible pricing models.

Startups in the segment include Neysa, E2E Networks, NxtGen Cloud Technologies, NeevCloud, and Yotta Data Services. Many of them are building specialised cloud infrastructure for AI workloads.

Currently, Indian cloud providers pay around 25% corporate tax on profits and 18% GST on domestic cloud services.

Concerns Around Policy Parity

Industry leaders say the policy could create challenges if export-oriented incentives are not extended to Indian providers.

A S Rajgopal, CEO and MD of NxtGen Cloud Technologies, says Indian companies exporting cloud services may need to rely on existing frameworks, such as the Software Technology Parks of India (STPI).

“Indian service providers may need to leverage frameworks such as STPI or wait for policy parity to ensure domestic players receive similar support,” Rajgopal says.

He also cautioned that policies should be designed carefully to avoid foreign jurisdictions asserting legal control over data hosted in India.

According to the Economic Survey 2026, India’s installed data centre capacity could rise sharply in the coming years. Capacity is projected to grow from about 1.4 GW in the second quarter of 2025 to nearly 8 GW by 2030.

The expansion is driven by increasing data consumption, cloud adoption, and demand from AI, IoT and 5G technologies.

Double-Edged Sword 

Narendra Sen, CEO of NeevCloud, tells AIM that the policy could increase investor interest in India’s data centre ecosystem.

“Data centres are capital-intensive assets and depend heavily on large anchor customers,” Sen says. “Without major cloud providers operating locally, building large facilities can be risky.”

He compared data centres to hotels that require consistent occupancy to remain financially viable.

“If large global cloud providers operate in India, it gives the ecosystem credibility and helps fill these facilities,” Sen says.

India’s geographical location could also allow the country to serve South-East Asian markets with lower latency. Instead of data travelling from the United States with delays of about 200 milliseconds, services hosted in India could reach nearby markets much faster.

“If infrastructure is built here, India can become a hub for a large share of the world’s population,” Sen notes, referring to markets such as Indonesia, Bangladesh, China and India.

He estimates that even reaching 10 GW of data centre capacity could attract around $60 billion in direct investment.

Risk of a Tax Disadvantage

Despite the potential benefits, domestic cloud providers argue that policy parity will be critical.

“If Indian cloud companies export services, they should receive the same benefit,” says Sen. “Otherwise, domestic firms may face a tax disadvantage compared with foreign providers operating from India.”

He warns that companies could eventually consider setting up overseas entities to access similar incentives. “If we have to compete globally while paying taxes that others do not, it becomes difficult,” he says.

However, Yotta Data Services appears more optimistic about the policy.

Sunil Gupta, Chief Executive Officer at Yotta, in an interview to a business publication, said that the tax holiday is primarily intended to encourage exports rather than subsidise domestic cloud consumption.

Building a Sovereign AI Stack

Karan Kirpalani, Chief Product Officer at Neysa, tells AIM that building sovereign AI infrastructure requires support across the entire technology stack.

“If we want to succeed as a country, every element of the stack has to move forward together — data centres, semiconductor manufacturing and cloud infrastructure,” he says.

He adds that expanding data centre capacity could create new collaboration opportunities between cloud providers and infrastructure operators.

Neysa already works with multiple partner data centres in India and plans to deepen those partnerships as its infrastructure requirements grow.

“We are increasingly looking at co-engineering infrastructure with data centre operators to optimise cooling, power density and overall performance,” Kirpalani says.

Hardware and Supply Challenges

Infrastructure providers are also dealing with rising hardware costs and supply chain constraints.

Rajgopal says components such as DRAM memory and NVMe storage have become more expensive due to global shortages. Delivery timelines for networking components such as transceivers also remain uncertain.

“There are supply constraints across several components,” Rajgopal says. These challenges, he adds, highlight the importance of building strong domestic infrastructure providers to support India’s digital sovereignty.

Global cloud providers have already announced large investments in India. Google plans to invest $15 billion to build its first AI hub in the country, along with a gigawatt-scale data centre campus in Visakhapatnam.

Microsoft committed $17.5 billion toward AI infrastructure, including a large data centre region in Hyderabad. They expect to launch this year and expand in Chennai, Mumbai and Pune.

Amazon Web Services committed a $12.7 billion investment to expand its cloud infrastructure in India by 2030.

What Can the Government Do?

Industry leaders say additional policy measures could help strengthen domestic infrastructure providers.

Rajgopal suggests that the government could consider preferential procurement policies for domestic cloud providers in sectors such as government services, defence, financial services and healthcare.

He also emphasises the importance of maintaining data sovereignty.

Service providers operating in India, he says, should be able to guarantee that Indian data remains outside foreign jurisdiction.