Union Budget 2026 signals a clear change in how India taxes non‑residents at a time when global investors are closely watching the country’s reforms in digital, manufacturing and capital markets. As cross-border business models increasingly rely on digital platforms and global delivery, the Budget seeks to offer greater tax certainty for non‑residents, while safeguarding India’s right to tax income linked to its economy.

The proposals on non‑resident taxation clearly reflect long‑term policy priorities —attracting high‑value foreign investment, building India's digital infrastructure and boosting services exports and reducing protracted tax disputes. The measures range from a new path‑breaking tax holiday for foreign companies using India‑based data centres, to targeted incentives for suppliers of capital equipment, safe harbour rationalisation for IT‑GCCs, faster APA outcomes and a fundamental reset of the buyback tax regime.

This article analyses some of the key reforms, assesses their potential impact on industry, and highlights how Budget 2026 seeks to position India as a predictable, competitive and globally aligned investment destination for non‑residents.

Tax Holiday till Year 2047 for Cloud and AI Giants to Power India’s Data‑Centre Growth

With an intent to anchor India as a global cloud and AI hub, the Budget proposes a tax holiday until March 31, 2047, for foreign companies providing cloud services to global customers through India‑based data‑centre facilities. The detailed contours of the regime will be clarified once the Government issues the relevant notification, but a key prerequisite is clear - the foreign company must not own or operate any digital infrastructure in India. For India‑facing services, routing through an Indian reseller remains mandatory to preserve data‑sovereignty safeguards.

This proposal is positioned to materially reduce long‑standing Server‑PE and digital‑nexus controversies by offering a clear, tax‑free framework for cloud providers relying on India‑hosted infrastructure. It significantly mitigates the risk of a Permanent Establishment, the resulting attribution disputes, and the recurring withholding‑tax exposure on data‑hosting or processing fees that have often been recharacterized as royalty or FTS. While limited PE concerns may still arise where the foreign enterprise exercises effective control over India‑based servers, the overall exposure is expected to reduce meaningfully.

To further streamline tax outcomes, the Budget introduces a 15% safe harbour margin for related‑party data centre services. This is a meaningful reform as it clearly distinguishes cloud services from data‑centre operations, eliminates ambiguity in benchmarking mixed‑function models, and is expected to sharply reduce subjectivity and disputes around Transfer Pricing (TP).

Taken together, Budget 2026 introduces targeted tax incentives to boost India’s data centre investments by providing a long‑term tax holiday to foreign companies leveraging India‑based infrastructure. This tax holiday combined with expected PE risk rationalisation, reduced WHT exposure and clearly defined TP certainty, recognises India’s growing need for data centre capacity and creates a compelling incentive for global cloud and AI players.

The Buyback Roller‑Coaster Continues — Capital Gains Regime is back

Budget 2026 proposes another major change to India’s long‑evolving buyback tax regime. For share buybacks carried out on or after April 1, 2026, the amount received by shareholders will be taxed as capital gains instead of dividends. This marks a return to the original capital gains framework for taxation of buyback.

Under the proposed buyback taxation mechanism, a share buyback is effectively treated as a transfer of shares, aligning India’s approach with global practice where buybacks are generally taxed as capital gains.

The regime introduces a differentiated outcome by imposing a higher tax burden on promoters through an additional levy over the standard capital gains tax rates. A key design element is the introduction of an additional tax on “promoters”, defined as:

• persons classified as promoters for listed companies; or
• for unlisted companies, those who control the company or hold more than 10% (direct or indirect)

This promoter‑specific levy is in addition to normal capital gains tax rate and is further subject to surcharge and cess. For foreign corporate promoters, the effective tax rate on long‑term capital gains increases to roughly 32.76%, a sharp rise from the earlier 13.65%, materially escalating the cost of repatriation through buybacks.

While this reflects the Government’s ongoing intent to rationalize taxation of share buybacks, the change may not be uniformly adverse for foreign investors. Under the proposed regime, the cost of acquisition would be allowed as a deduction, rather than being treated as a capital loss under the current regime, thereby enabling foreign shareholders with a high cost base to incur lower capital gains tax.

Further, in certain cases, capital gains unlike dividends may still benefit from preferential tax treaty treatment, particularly under treaties that allocate taxing rights to the country of residence, subject to treaty eligibility conditions.

Overall, while the new framework narrows the scope for using buybacks as a blanket alternative to dividends, select shareholders may find the proposed capital gains taxation comparatively more tax efficient, depending on their specific tax treaty position.

Transfer Pricing Reforms for GCCs - Safe Harbour Reset, Faster APAs and a Push for Certainty

Budget 2026 proposes major changes to the transfer pricing rules for the IT and global capability centre (GCC) sector. Multiple IT‑enabled service categories including software development, ITeS, KPO and contract R&D, will be grouped under a single category called ‘Information Technology Services’.A uniform safe harbour margin of 15.5% on cost will apply to this category and can be adopted for 5 consecutive years. The exact contours will be clearer once the revised safe harbour rules and notifications are issued.

The Budget also proposes to raise the turnover limit for using the safe harbour route, from INR 3 billion to INR 20 billion, dramatically expanding its coverage and bringing a much larger segment of GCCs within its scope. This should materially reduce benchmarking disputes and introduce pricing predictability for large captive units.

To improve dispute resolution, the Budget proposes to complete unilateral APA proceedings within two years, with a possible extension of up to six months at the taxpayer’s request. This commitment to faster APAs is a strong signal of the Government’s intent to deliver timely TP certainty.

Another welcome reform is the proposal to extend the facility of filing modified returns for APA years to the Associated Enterprises (AEs) of the APA applicant. This is a notable development from a group perspective, as it enables corresponding adjustments in the hands of related parties, potentially allowing tax refunds for the AE.

Overall, these reforms mark a decisive push to boost GCC investments by offering attractive safe‑harbour margins across the IT/ITeS spectrum and reinforcing long‑term tax predictability. Budget 2026 clearly recognises the pivotal role of GCCs in driving India’s services‑export engine.

Tax Holiday for Capital Equipment suppliers - Boost to India’s Electronics Manufacturing

To promote India’s electronics manufacturing ecosystem and de‑risk non‑resident participation in toll‑manufacturing models, Budget 2026 proposes a five‑year tax holiday (up to Tax Year 2030‑31) for income earned by a non‑resident from supplying capital goods, equipment or tooling to an Indian contract manufacturer. The exemption applies where the Indian manufacturer:

• operates within a Customs‑bonded manufacturing zone, and
• undertakes production of “electronic goods” on behalf of the foreign principal.

The Budget also introduces a 2% safe harbour margin on the invoice value (resulting into an effective tax of approx. 0.7%) for non‑resident entities engaged in component warehousing within bonded facilities. This offers much‑needed predictability for low‑margin logistics and warehousing functions in the electronics supply chain.

Historically, foreign ownership or control of equipment located in India, combined with close involvement in manufacturing has triggered Fixed Place PE or Agency PE exposure, leading to attribution disputes for foreign OEMs. The proposed regime substantially narrows PE‑risk for qualifying structures, since the capex remains under the custody, control and operational responsibility of the Indian manufacturer, not the non‑resident.

Building on the presumptive taxation regime introduced in the Finance Act, 2025 for foreign companies supporting India’s electronics manufacturing ecosystem, the Budget further seeks to rationalise MAT and enhance certainty for non‑residents. It proposes to exempt all non‑resident taxpayers from MAT, where their income is taxed on a presumptive basis. By extending this relief to non‑resident businesses providing services or technology for setting up electronic‑manufacturing facilities, the measure offers a clearer and more predictable tax framework for global electronics players.

Overall, the proposal aligns with the Government’s broader objective to anchor high‑value electronics production in India, enable contract manufacturers to access advanced foreign machinery, and give non‑resident suppliers certainty and tax neutrality when engaging in India‑based manufacturing ecosystems.

Incentivising Global Talent: Five-year tax relief for Non‑Resident Individuals

To attract global talent and support professional services linked to India’s growth sectors, the Budget introduces a targeted relief for non‑resident individuals working in India under approved schemes.

Under the proposal, income accruing or arising outside India during the individual’s period of visit will remain outside the Indian tax net for five consecutive years, provided the individual was a non‑resident for the preceding five years. The relief applies to services rendered in connection with a scheme notified by the Central Government, with further conditions expected to be prescribed.

This measure offers meaningful certainty for expatriates and encourages vast pool of global talent to work in India for longer period of time.

Concluding remarks

Budget 2026 marks a clear pivot towards greater tax certainty for non‑residents, backed by long‑term incentives for cloud players, TP reforms for GCCs, and targeted relief for capital equipment suppliers.

The proposals collectively send a clear message: India is open to global capital, technology and large-scale manufacturing, while expecting stronger compliance and real economic presence. The shift also shows that India is unmistakably moving from reactive rule‑making to a more predictable, forward‑looking international tax framework.

The views expressed are strictly personal.