NON-RESIDENT taxation seems to have finally entered mainstream policy making in India with the Finance Minister announcing a slew of substantial changes in this area in the Budget presented on the 1st of February 2026.

In the area of non-resident taxation, the provision that has got maximum attention is the proposal for granting a tax holiday of 20 years till 2047 for foreign companies procuring services from Indian data centers till 2047- the year we are supposed to become fully viksit. So, it will be worthwhile to examine this proposal first.

In her Budget speech, under the caption- 'Attracting global business and investment,' the Finance Minister stated:

"130. Recognising the need to enable critical infrastructure and boost investment in data centres, I propose to provide tax holiday till 2047 to any foreign company that provides cloud services to customers globally by using data centre services from India. It will, however, need to provide services to Indian customers through an Indian reseller entity.

131. I also propose to provide a safe harbour of 15 percent on cost in case the company providing data centre services from India is a related entity."

Thus, the incentive is for boosting infrastructure and more particularly for boosting investments in data centres. If a foreign company provides cloud services to its global clients (including Indian clients) through these data centres, then the income, if any, that may arise to the foreign company in India will be exempt from tax for 20 years. Although servicing global clients from the data centre has been mentioned, what is alluring for the foreign company is the Indian market. Foreign markets can be serviced from other data centres also. The recent data localisation drive of the government could be an incentive for foreign operators to access the lucrative Indian market through this route.

But why this tax concession was necessary now? One can only speculate that potential foreign investors promising big bucks in Indian data centres in their pourparlers with Indian interlocutors, expressed apprehension about possible permanent establishment exposure in India. The Supreme Court in the Hyatt International case having held that continuous presence of employees of a foreign parent company at the premises constituted a permanent establishment of the parent company in India, the guess is that potential foreign investors wanted some kind of assurance before committing any investment. The Supreme Court decision in the Formula One case also interpreted the 'at the disposal' test in a way not to the liking of the foreign companies. Besides, under Indian domestic tax law, transaction in respect of any goods, services, or property by a non-resident with any person in India including provision of download of data or software in India beyond a prescribed limit will constitute a significant economic presence (SEP) thereby constituting a business connection in India. Though the SEP provision applies in non-treaty cases, the apprehension remains.

In this connection, it is also interesting to note an interview that moneycontrol had done with the IT Minister of Andhra Pradesh- Google's $10 Billion Vizag Data Centre Gets Tax Clarity: Nara Lokesh (October 14, 2025)¹

Asked about what went behind the scenes in convincing Google in coming and investing in Andhra Pradesh despite competition from states like Tamil Nadu and Karnataka, the minister stated:

"In Andhra Pradesh we have a double engine bullet train. (…) -it's been a great relationship between the state government and the central government. We are able to provide not only best in class incentives, but we are able to help in terms of creating policies and any changes that are required at the central government level. So, we were able to lead these conversations from the front.

(…), our first meeting with Google was way back in September 2024 where I hosted them in Vishakhapatnam over lunch, drove them down personality to show them where they can do their data centre and then I followed it up with my visit to their HQ; continued our conversations at the central government level. Got a lot of clarity on various points and then here we are-a year later rounding India's largest FDI investment ever."

Asked about the key things that Google has asked, the terms of engagement that have been discussed and agreed upon, the Minister stated:

(..) from an incentive package, (…), every state is competing and we are going to compete on the incentive package in that sense.

But what got us talking even more is the change(s) that is required at the central government level at the policy level interventions- (…) how would you define permanent establishment, how do you look at data that comes in gets processed and then goes out, how do you look at data embassies.

So, these were the questions that we were able to answer which no other state was able to answer because again in Andhra, we have a double engine bullet train working. (…)"

Let us now see how the provision has been translated in law. Note that the FM has mentioned providing tax holiday to foreign companies providing cloud services globally by using data centre services from India.

But before that, it is necessary to note that we are now dealing with 'The Income Tax Act, 2025' that was already enacted in 2025 replacing the familiar Income Tax Act, 1961. In the earlier days, we knew that if there is an exemption, the section to look forward to was section 10.

In the new scheme of things, chapter III of the Income Tax Act, 2025 contains section 11 that deals with incomes which do not form part of total income. That section then refers to schedules II-VI. Schedule IV deals with income not to be included in total income of eligible non-residents, foreign companies, and other persons. A Table divided in four columns gives the serial number, Income not to be included in total income, Eligible persons, and conditions.

This particular proposal is contained in the newly inserted column 13C

13C

'Note 3: For the purposes of Sl.No.13C, ––

(a) "data centre" means a dedicated secure space within a building or centralised location where computing and networking equipment is concentrated for the purpose of collecting, storing, processing, distributing or allowing access to large amounts of data;

(b) "data centre services" means the services provided by a data centre through the use of physical infrastructure including land, buildings, mechanical electrical power equipments, cooling system, security and information technology infrastructure including servers, computers, storage systems, operating systems, security solutions, network and associated software platforms, networking and other equipment, human resource in India;

(c) "specified data centre" means a data centre which is––

(i) set up under an approved scheme and is notified in this behalf by the Central Government in the Ministry of Electronics and Information Technology; and

(ii) owned and operated by an Indian company.'

It is clear from the proposed legislation that the exemption is available to the income of a foreign company providing data centre services from a data centre in India. Such services to Indian customers however have to be provided by an Indian reseller company. The reseller company can be a subsidiary of the foreign company or any other Indian company. Considering that there are important domestic players in the data centre business - ST Telemedia Global Data Centres, Yotta Data Services, CtrlS, NTT Global Data Centers, Nxtra, Sify Technologies, Equinix, Digital Connexion, AdaniConneX, Iron Mountain and many more², immediately after the budget presentation, concerns were raised that by providing the exemption to foreign data centres (hyperscalers-like Google, Amazon etc), the Indian data centres were being discriminated against.

The Finance Ministry then issued a clarification through a post in X:³

"KIND ATTENTION TAXPAYERS!

Budget 2026 provides exemption to a foreign company which provides cloud services globally including in India.

The exemption is available from Tax year 2026-27 onwards till Tax year 2046-47.

There are four essential conditions for the foreign company to satisfy-

1. The foreign company is notified.

2. The data centre company in India from which data centre services are taken is an Indian company. 3. The data centre is notified by MeiTY.

4. The services by the foreign company to Indian users is provided through an Indian reseller entity, being an Indian company.

The exemption provides certainty to foreign companies who are in the business of providing cloud services and procure services from a data centre in India.

There will not be any risk for such foreign companies of their global income being taxed in India on this account.

The profits on the income from domestic economic activities that is –

(i) data centre services to the global entity by the resident data centre; and

(ii) resale of cloud services to Indian customers by the resident reseller entity, will remain taxable as any other domestic company

However, where the Indian data centre is a related entity of foreign company (cost plus centre), safe harbour margin of 15% is provided.

The treatment of foreign cloud services entity is the same whether the data centre is Indian owned or a subsidiary of the global entity. So, the level playing field between an Indian owned data centre and the subsidiary of a foreign company remains the same as earlier."

Although the prompt action of the department is to be appreciated, it is not clear why the same had to be through a post in X, not everybody has an account in social media.

Later, the IT and Electronics Minister. Mr. Ashwini Vaishnaw is reported to have said that the Indian and foreign data centres will be treated at par⁴. While the clarification from the Income Tax department is understandable as it makes a distinction between a foreign data centre and the parity between Indian and foreign owned resellers in that their Indian income remains fully taxable in India, it is not clear how this brings parity between Indian and foreign data centres providing global services from India.

The safe harbour provision of 15% as mentioned by the FM is contained in the Table to Rule 89. Item no 9 of the draft Rules put out for public consultation.

Contract manufacturing:

Another important concession in non-resident taxation is the concession in respect of toll manufacturers of electronic manufacturing up to tax year 2030-31. In her budget speech, the FM stated:

"133. To provide fillip to toll manufacturing in India, I propose to provide exemption from income tax for 5 years, to any non-resident who provides capital goods, equipment or tooling, to any toll manufacturer in a bonded zone."

The actual provision in the Finance Bill is in the newly inserted column 13A of Schedule IV as follows:

13A

Although the FM has framed the proposal as promoting contract manufacturing in the 'electronic manufacturing', it seems that the exemption is tailored for Apple that has started manufacturing iPhone in India. It was reported that Apple was concerned about its global profits being drawn into Indian tax ambit in terms of the expansive business connection provision in the domestic law that treats foreign ownership of manufacturing equipment used in India as a business connection.

The government seems to have resolved the issue through this specific exemption without tweaking the business connection rule generally subject to the condition that the factory must be set up in customs- bonded areas that are technically considered to be outside Indi's customs border.⁵

Incidentally, the Budget also reduces the customs duty on smartphone components that will also benefit global players such as Apple and Samsung.

Component warehousing

Besides the above, the FM has also provided for a specific safe harbour for component warehousing

"132. To harness the efficiency of just-in-time logistics for electronic manufacturing, I propose to provide safe harbour to non-residents for component warehousing in a bonded warehouse at a profit margin of 2 percent of the invoice value. The resultant tax of about 0.7 percent will be much lower than in competing jurisdictions. ⁶

The 0.7% seems to be from applying 35% headline rate of foreign companies to the 2% safe-harbour profits of the non-resident from warehousing. Apparently, Vietnam provides 1 % margin with conditions.

Since the power to make rules is already available under section 167 of the ITA 2025, the proposal is translated in the draft Income Tax Rules. In the draft Rule 99 (c)(ii), "eligible assessee" means: -

a foreign company who stores components in a warehouse in a custom bonded area for providing them to a contract manufacturer to be used for manufacturing of specified electronic goods;

Rule 99(d), then defines "eligible business" as : -

(…)

(ii) the business activity of storage of components in a warehouse in a custom bonded area for sale to a contract manufacturer to be used for manufacturing of specified electronic goods;

Proposed Rule 100 provides the Table, the relevant part of which is as follows:

Attracting Global Talent:

The FM speech mentions:

"134. To encourage vast pool of global talent to work in India for a longer period of time, I propose to provide exemption to global (non India sourced) income of a non-resident expert, for a stay period of 5 years under notified schemes".

The proposal gets translated into law through item no 13B of Schedule IV as below:

13B

One of the refrains from the non-resident lobby has been that expatriates (non-resident individuals) do not prefer to come to India on long term assignments because of India's residency rules that will make the expatriates subject to Indian taxation of their global income. The government has given in to their demands albeit with some conditions. These are that the individual must have been non-resident for 5 consecutive years before coming to India for the first time and the services must be in respect of a notified scheme and only the income that accrues outside India and which is not deemed to accrue in India, is entitled to exemption for a period of five consecutive years. The scheme is yet to be notified.

The logic of this exemption is doubtful as the expatriates should get credit for the taxes paid In India in their country of residence. One only hopes that the provision does not degenerate into another tax planning structure.

The FM has also proposed to provide exemption from Minimum Alternate Tax (MAT) to all non-residents who pay tax on presumptive basis. (Para 105 of the FM's speech)

IT Services Safe Harbour

Ever since introduction of Transfer pricing provisions in India, this is the most litigated area. The way to reduce litigation is to have appropriate safe harbour provisions and a robust APA regime. Although India's APA programme is considered to be a success story, the safe harbour provisions are not attractive enough. Most of the litigations are also related to the inter-group services provided and utilised in MNC firms in the IT sector. The speech of the Finance Minister in this regard states:

"Supporting IT sector as India's growth engine

124. India is a global leader in software development services, IT enabled services, knowledge process outsourcing services and contract R&D services relating to software development. These business segments are quite inter-connected with each other.

125. All these services are proposed to be clubbed under a single category Information Technology Services with a common safe harbour margin of 15.5 percent applicable to all.

126. The threshold for availing safe harbour for IT services is being enhanced substantially from 300 crore rupees to 2,000 crore rupees.

127. Safe harbour for IT services shall be approved by an automated rule-driven process without any need for tax officer to examine and accept the application. Once applied by an IT Services company, the same safe harbour can be continued for a period of 5 years at a stretch at its choice.

128. For IT services companies who want to conclude Advance Pricing Agreement (APA), I propose to fast track Unilateral APA process for IT services and endeavour to conclude it within a period of 2 years. The period of 2 years can be extended by a further period of 6 months on taxpayer's request.

129. I propose to extend the facility of modified returns available to the entity entering APA to its associated entities also."

Thus, all different types of services are now grouped under a single head- Information Technology sector with a uniform margin of 15.5% as against the earlier margin of 17-24% in different categories. Very large companies with turnover of more than 2000 crores are not entitled to avail of this benefit.

Giving Effect to APA orders

As a result of an APA, there will be adjustments in the income level of an enterprise and the related entities. Under section 92CD (Section 169 of the IT Act 2025), only the person who has entered into the APA is entitled to modify the return. The provision did not allow for the corresponding modification in the income or filing of return by the associated enterprise. As has been promised by the FM, this has now been allowed.

Section 169(1) of the IT Act,2025 now says:

"(1) Irrespective of anything to the contrary contained in section 263, where an income is modified as a result of advance pricing agreement entered into with any person then, such person shall, or any other person being an associated enterprise may,–

(a) furnish a return or a modified return in accordance with and limited to the agreement; and

(b) the time period for furnishing such return or modified return shall be three months from the end of the month in which the agreement was entered into,

where the tax years relevant for such return or modified return shall be the years covered by such agreement."

Apart from these important areas, there are more changes that affect non-resident taxation. Some of these are:

Relaxation from requirement to obtain tax deduction and collection account number (TAN) by a resident individual or HUF, where the seller of the immovable property is a non -resident

In this regard, Para 110 of the FM's speech states "TDS on the sale of immovable property by a non-resident is proposed to be deducted and deposited through resident buyer's PAN based challan instead of requiring TAN."

The provision is particularly relevant for non-resident Indians who sell their property in India. Under the extant rules, the purchaser is required to deduct tax at source after obtaining a TAN if the seller is a non-resident. It has been explained in the Memorandum that this creates unnecessary compliance burden for the purchaser in that he/she will need to get a TAN even for a single transaction. The requirement for obtaining a TAN in such cases has been done away with.

Foreign Assets of Small Taxpayers - Disclosure Scheme, 2026 (FAST-DS 2026)

Under ease of living, the FM in her budget speech stated:

111." To address practical issues of small taxpayers like students, young professionals, tech employees, relocated NRIs, and such others, I propose to introduce a one-time 6-month foreign asset disclosure scheme for these taxpayers to disclose income or assets below a certain size."

At the time of introduction of the Black Money Act in 2015, a small window of voluntary disclosure from 1 July 2015 to 30 September 2015 was provided. Subject to payment of tax and penalty, the delinquent taxpayer could get immunity under the Black Money Act. There was not much response to the scheme.

The return of income now contains a schedule of Foreign assets (FA). The tax department has observed that there is non-compliance in this regard and non-compliance is particularly prevalent in cases involving legacy or inadvertent non-disclosures for small taxpayers, including holdings arising from foreign employment benefits such as ESOPs or Restricted Stock Units, dormant or low-value foreign bank accounts of former students, savings or insurance policies of returning non-residents, and assets held by individuals on overseas deputation. The department now receives substantial information under the automatic exchange of information programme and has noticed that such information received indicates non-disclosure of foreign financial assets by a significant number of PAN holders.

In order to facilitate voluntary compliance and enable resolution of such legacy cases of small taxpayers, the government now proposes to introduce a time-bound scheme for declaration of foreign assets and foreign-sourced income, with payment of tax or fee based on the nature and source of acquisition and grant of limited immunity from penalty and prosecution under the Black Money Act in respect of matters covered by the declaration. Cases involving prosecution or proceeds of crime will be excluded. The relevant provisions are contained in Chapter- IV of the Finance Bill 2026 in sections 114 to 128 known as- The Foreign Assets of small Taxpayers Disclosure Scheme, 2026.

The types of assets/ income, the amount payable and the conditions are as follows:

Considering the depreciating value of the Indian rupee, the amount of one crore seems to be very low. Voluntary disclosures in India have not been very successful in India so far. Now that the government is in possession of a large amount of information, it is to be seen how this one fares.

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¹ [https://www.youtube.com/watch?v=JryQNJh3Yus]

² https://datacentremagazine.com/top10/top-10-data-centre-companies-in-india

³ https://x.com/IncomeTaxIndia/status/2019046108673265855

⁴ Economic Times, 10 Feb.2026- Govt assures equal Treatment for Local, Foreign Data Centre Cos

⁵ Source- Union Budget 2026: India hands Apple a win by letting foreign firms fund equipment for manufacturers-: https://www.deccanherald.com/business/union-budget/union-budget-2026-india-hands-apple-a-win-by-letting-foreign-firms-fund-equipment-for-manufacturers-3882284

⁶ (https://thepamphlet.in/indias-new-tax-gambit-under-modi-government-how-a-0-7-rate-could-pull-manufacturing-giants-towards-india/#:~:text=India's%20new%20proposal%20sets%20the,biggest%20competitor%20by%2030%20percent.)