As the Union Budget announced tax holiday for data and cloud centre companies, Finance Ministry sources on Wednesday clarified four essential conditions for foreign firms to meet to become applicable for the exemption.

The exemption is available from tax year 2026-27 onwards till tax year 2046-47, to "a foreign company which provides cloud services globally including in India," sources said.

Four essential conditions must be satisfied by the foreign company to qualify for the exemption.

The foreign company must be notified and the data centre company in India from which data centre services are taken must be an Indian company, they said.

Other conditions include, "The data centre must be notified by MeiTY and the services from the foreign company to Indian users must be 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," according to the sources.

The profits on the income from domestic economic activities such as data centre services to the global entity by the resident data centre; and resale of cloud services to Indian customers by the resident reseller entity, will remain taxable as any other domestic company, according to the sources.

However, a safe harbour margin of 15 per cent is provided in case the Indian data centre is a related entity of foreign company (cost plus centre).

The treatment of foreign cloud services entity remains same regardless of the data centre being Indian-owned or a subsidiary of the global entity, maintaining a level playing field, they added.

Indian data centres can now confidently offer their services to such global cloud entities, without the latter perceiving any tax risk on account of using Indian data centres.

The move is aimed at developing critical infrastructure and boosting investment in data centres.