Indian incentives for foreign cloud providers using local DCs to deliver globally could stabilize cloud costs

The Indian government’s newly announced incentives for foreign cloud providers could also recalibrate cloud economics for local CIOs, analysts say.

During the presentation of the Union Budget to Parliament on Sunday, India’s Finance Minister Nirmala Sitharaman outlined a series of proposals that were aimed at boosting India’s data center ecosystem.

These proposals include a tax exemption through 2047 on revenue from cloud services delivered to overseas customers by foreign firms using data centers based in India.

However, in order to access the multi-year tax incentives, the foreign companies will need to ensure that  their operations in India are owned and operated by an India-registered data center, which could also be a “related” entity: the India-registered arm of the foreign data center firm. Any sales to users located in India must be made through an Indian reseller, and would be taxed.

The tax exemption, according to Avasant research director Gaurav Dewan, is expected to gradually stabilize cloud costs instead of triggering immediate price cuts, giving CIOs better leverage in negotiations, especially for long-term AI and sovereign workloads.

For one thing, the exemption will lower ongoing operating costs for foreign data center providers when they’re working through Indian resellers or related entities, which will attract a lot of players while intensifying competition, thus offering more choice to CIOs, Dewan said.

An expected increase in third-party data center capacity, combined with hyperscaler resale arrangements, will also expand the available infrastructure pool, the analyst noted, adding that this is especially significant for GPU-intensive AI workloads, which remain among the largest cost drivers for CIOs.

“Greater availability of AI-ready capacity within India could help curb scarcity-driven pricing over time, gradually easing cloud costs,” Dewan pointed out.

Explaining why the price cuts won’t be immediate, the analyst said that hyperscalers, such as AWS, Microsoft, and Google, rarely pass on savings directly to their customers.

In addition, enterprises consume bundled services, limiting their pure infrastructure price exposure, Dewan noted, adding that hyperscalers are also constrained by GPU supply.

More stable contracts and negotiation power

Another provision announced by the Finance Minister is also expected to help CIOs budget in the long run.

In cases where data center operations in India are carried out by a related entity of the foreign data center firm, Sitharaman has proposed allowing a markup of up to 15% over costs under safe harbor norms. These provisions, set out in the Indian Income tax Act, allow tax authorities to accept the declared pricing for transactions between related companies without further scrutiny.

In practice, this reduces transfer pricing uncertainty for multinational cloud and data center operators, a change that could simplify operating models and pricing negotiations for CIOs relying on global cloud platforms such as AWS, Microsoft, and Google, said Pareekh Jain, principal analyst at Pareekh Consulting.

Typically, Jain said, when data center firms face uncertainty about how their internal costs will be taxed, they tend to build that risk into customer contracts, especially through higher prices, complex commercial terms, or frequent renegotiations.

Clearer rules reduce that risk, because when providers know the tax rules won’t change mid-game, CIOs are less likely to see unexpected costs show up in their cloud bills or contracts, the analyst said.

If the budget is passed as presented, the new tax incentives will take effect on April 1.