Union Budget 2026-27: Expanding Business Opportunities for Foreign Companies in Data Centres and Electronics Manufacturing

 

India’s Union Budget 2026–27, announced on 1 February 2026, signals a decisive policy shift toward attracting foreign capital, technology, and expertise in strategic sectors. The Budget positions India not merely as a consumption market, but as a global base for digital infrastructure and high-value electronics manufacturing.

Through long-term tax incentives, expanded production-linked schemes, compliance simplification, and targeted execution support, the Government has created clear and bankable opportunities for foreign companies—particularly in data centres, cloud services, electronics manufacturing, and semiconductors.

1.  Digital Infrastructure: Long-Term Tax Visibility for Data Centres and Cloud

Extended Income Tax Exemption

One of the most significant measures introduced in Budget 2026 is a long-term income tax exemption for foreign companies providing cloud and digital services through Indian data centres.

Opportunity for Foreign Companies

•  Establish or operate hyperscale and enterprise data centres in India.

•  Use India as a cost-competitive hub for AI workloads, cloud computing, disaster recovery, and data localisation-compliant services.

•  Serve both global and regional customers from Indian infrastructure.

Key Conditions

To qualify for the exemption:

•  Cloud or digital services must be provided exclusively through data centres located in India.

•  The data centre must be notified or approved by the Central Government / MeitY.

•  Services provided to Indian customers must be routed through an Indian incorporated entity or authorised reseller.

•  Separate books of account must be maintained for eligible operations.

•  Exempt income must be derived solely from notified cloud or data centre services.

  

Tax Certainty: Safe Harbour and MAT Relief

To address transfer pricing and tax litigation concerns, the Budget introduces structured certainty mechanisms:

Safe Harbour Framework

•  Applies to international or specified domestic related-party transactions involving cloud or data centre services.

•  The Indian entity must maintain a minimum operating margin of 15% on cost.

•  Taxpayers must opt into the prescribed safe harbour regime within notified thresholds and timelines.

MAT Relief

•  Non-resident companies taxed under presumptive regimes are exempt from Minimum Alternate Tax (MAT).

•  This reduces effective tax costs for foreign operators without a full-scale permanent establishment.

Operational Enablement: Deployment of Global Experts

Large-scale data centre projects often require specialised foreign expertise during design, commissioning, and stabilisation phases.

Budget 2026 provides targeted tax relief for foreign professionals engaged in government-approved digital infrastructure projects.

What This Enables

•  Deployment of global cloud architects, commissioning engineers, AI infrastructure specialists, and cybersecurity experts.

•  Reduced tax friction on foreign-sourced income of eligible non-resident professionals.

•  Faster stabilisation of hyperscale facilities.

Commercial Impact

•  Income tax exemption available until 31 March 2047, offering exceptional long-term certainty.

•  Reduced transfer pricing litigation risk.

•  Improved internal rate of return (IRR) for capital-intensive infrastructure investments.

•  Lower execution risk through easier deployment of specialised global talent.

Together, these measures position India as a stable, long-duration digital infrastructure platform.

2.  Deep Electronics Manufacturing: Building Component Ecosystems

Electronics Components Manufacturing Scheme (ECMS)

Budget 2026 strengthens the Electronics Components Manufacturing Scheme, signalling a shift from assembly-led growth toward deep component manufacturing and value addition.

Opportunities for Foreign Companies

•  Establish or expand production of electronic components, sub-assemblies, and precision parts.

•  Enter long-term supply arrangements with Indian OEMs and global exporters.

•  Integrate Indian operations into global supply chains.

Key Conditions

•  The applicant must be an Indian incorporated company, including subsidiaries of foreign companies.

•  Minimum capital investment thresholds as notified under the ECMS guidelines must be met.

•  Manufacturing must relate to notified electronic components or sub-assemblies.

•  Incentives are linked to incremental production and sales over a defined base year.

•  Compliance with local value-addition and reporting requirements is mandatory.

Strategic Benefit

•  Diversification of supply chains away from single-country dependence.

•  Access to India’s expanding domestic and export demand.

•  Structured production-linked incentives that improve long-term viability.

•  Ability to deploy foreign technical specialists in approved projects to support process stabilisation and technology absorption.

The focus moves beyond assembly toward ecosystem depth and industrial resilience.

3.  India Semiconductor Mission 2.0: Structured Entry into a Strategic Sector

The launch of India Semiconductor Mission (ISM) 2.0 creates a defined pathway for foreign participation in a capital-intensive and strategically sensitive industry.

Business Opportunities

•  Joint ventures in:

 –  Semiconductor design

 –  Advanced packaging and testing

 –  Semiconductor equipment and materials

•  Technology licensing and intellectual property partnerships with Indian firms.

Conditions

•  Projects must fall within approved categories under ISM 2.0 including wafer fabrication, ATMP/OSAT, compound semiconductors, semiconductor design, or approved equipment/materials manufacturing, and must receive formal project approval.

•  Applicants must meet minimum capital expenditure and technology capability criteria.

•  Compliance with FDI policy and national security guidelines is required.

•  Incentives are milestone-based and subject to performance monitoring.

•  Long-term supply or technology transfer commitments may apply.

Technology Transfer and Specialist Deployment

Semiconductor manufacturing requires highly specialised engineering expertise, particularly during fabrication plant commissioning and process stabilisation.

Budget 2026 facilitates deployment of foreign experts to approved semiconductor projects.

Business Significance

•  Enables structured technology transfer.

•  Accelerates ramp-up of fabrication and testing facilities.

•  Reduces execution risk in high-capex projects.

•  Supports operational control during early production phases.

Why It Matters for Foreign Firms

•  Government-backed risk sharing in a high-investment industry.

•  Long-term domestic demand driven by electronics, automotive, telecom, and defence sectors.

•  Reduced operational friction in early-stage implementation.

4.  Toll Manufacturing and Bonded Zone Incentives

Budget 2026 introduces measures that make India more attractive for contract and toll manufacturing arrangements.

Opportunity

•  Supply capital goods, tooling, and specialised machinery to Indian toll manufacturers operating in bonded or notified manufacturing zones under the government’s bonded manufacturing framework.

Key Conditions

•  The toll unit must operate within a customs-bonded or notified zone.

•  Equipment must be used exclusively for eligible manufacturing activities.

•  The foreign supplier must remain a non-resident entity without a permanent establishment in India during the exemption period.

•  The exemption applies for five consecutive assessment years from commencement of supply.

•  Proper customs and tax documentation must be maintained.

Commercial Impact

•  Enables phased market entry without establishing full-scale manufacturing immediately.

•  Reduces customs duties and working capital exposure.

•  Provides a lower-risk route to participate in India’s manufacturing expansion.

5.  Warehousing and Electronics Supply Chain Hubs

To support manufacturing depth, the Budget rationalises tax treatment for logistics and bonded warehousing.

Opportunity

•  Establish electronics component warehousing and regional distribution hubs in India serving South Asia, the Middle East, and Africa.

Conditions

•  Warehouses must operate under customs bonding regulations.

•  Goods stored must relate to notified electronics components.

•  Operators must adopt a safe harbour profit margin of 2% of invoice value.

•  Services must be provided to eligible manufacturing or export-oriented units.

•  Ongoing customs and tax compliance filings are required.

Benefit for Foreign Companies

•  Low effective tax incidence.

•  Reduced transfer pricing exposure through prescribed safe harbour margins.

•  Enhanced feasibility of India-based regional distribution strategies.

Conclusion: A Strategic Platform for Long-Term Foreign Investment

Union Budget 2026–27 positions India as a credible, policy-backed destination for foreign investment in digital infrastructure and advanced electronics manufacturing.

By combining multi-decade tax incentives, structured compliance frameworks, production-linked schemes, bonded-zone efficiencies, and targeted talent mobility support, the Government has reduced entry barriers while enhancing long-term return visibility.

What This Means for Foreign Companies

•  Data centre and cloud operators gain unprecedented tax visibility and execution stability.

•  Electronics manufacturers can integrate into a deepening component ecosystem.

•  Semiconductor players receive structured entry into a strategic, government-supported industry.

•  Equipment suppliers and logistics operators benefit from bonded-zone and safe harbour advantages.

•  Multinational groups can deploy capital and specialist talent with reduced regulatory friction.

For foreign companies seeking scalable, policy-supported, and long-duration investment platforms, India’s post-Budget 2026 framework offers a compelling opportunity for global integration and sustained growth.

 

Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The aforesaid information is proprietary and privileged and is not to be used, reproduced and disclosed without consent. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any compliance under any legislature. The views expressed are strictly personal.

The above article is written by Sachin Chaudhary and CA Shravan Suratwala.

The authors can be reached at  contact@smsuratwala.com or shravan.suratwala@outlook.com.

Sachin is currently pursuing Chartered Accountancy course and is currently completing internship with S.M. Suratwala & Co., Chartered Accountants, Pune.

Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants. Shravan has 10+ years of post-qualification professional experience in advisory, litigation and compliance areas of Corporate and International taxation and Assurance. He has also worked three plus years in the field of Internal and Process Audit while pursuing chartered accountancy course.