IT industry seeks big push to AI in Budget 2026

The $280 billion-plus Indian technology sector is now facing a definite shift towards artificial intelligence (AI), and the industry expects a special focus on this technology in the forthcoming Union Budget.

Today, AI is not just about coming out with algorithms; it involves data centres, data collection and a governance structure on the applicability of this technology. This is an area where there is a genuine requirement for foreign capital, especially in the area of data centres, but this has created certain unfavourable implications of taxation.

Nasscom, the Indian IT industry’s premier body, noted in its pre-budget memorandum that foreign cloud providers rely on Indian data centres that are owned and controlled by Indian operators who already pay tax on their arm’s length margins. Industry experience has shown emerging instances where standard hosting or colocation is viewed as creating a taxable presence of the foreign provider in India.

“Clear illustrations that distinguish ordinary hosting from situations where a non-resident has infrastructure at its disposal would align practice with Supreme Court principles and give confidence for future investment in data and artificial intelligence infrastructure,” Nasscom said.

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At the same time, the advent of AI has also brought in business pressures for the IT and ITeS industry in terms of lower profit margins and increased competition.

Deloitte, in its Budget expectations note, said that given this environment, there is a need to reduce safe harbour margins for eligible IT/ITeS transactions to reflect current economic realities and cost pressures. It further sought the introduction of a separate safe harbour category for AI-enabled services, with lower margins, recognising the nascent and volatile nature of this segment.

“These measures will help maintain India’s competitiveness as a global outsourcing hub while providing much-needed relief to taxpayers navigating the AI transition,” it said.

The growth of AI is now predominantly focused on data centres, and this requires a certain incentive structure to sustain this momentum. Deloitte has suggested several measures like allowing full GST input tax credit/refunds on data-centre capital assets, a conditional tax holiday for data centre developers, customs duty waivers on critical imported equipment, a compute credit scheme on training AI models, etc.

Deloitte believes these measures would put India at the centre of the global AI map, where it would enable the building of large-scale AI models and also create skilled jobs. It further noted that this would allow India to rapidly expand its domestic computing capacity by attracting investments from institutions and hyperscalers to add gigawatts of new infrastructure. Also, this would reduce the dependence on offshore computing for AI model training.

The budget also needs to take into account the several dynamics of the AI industry, which is fast changing and requires investments in newer kinds of technology, which is capital-intensive. The right kind of incentives could lead to substantial employment generation while also making India a key player in the AI world.

Besides AI, there are other niggling issues for India’s technology industry, which largely revolve around the issue of taxation. The industry is hoping that the Union Budget will further enable the ease of business.

At the same time, the shining star of India's technology industry has been the global capability centres (GCCs)segment, which steadily continues to grow as global corporations are tapping into the human resources pool in the country. This segment is projected to touch $100 billion in revenue by 2030 with the presence of more than 2,400 GCCs.

“The GCC story is moving from cost and scale to productivity and capability. With the IndiaAI Mission, the direction is clear: India wants to be AI-ready at the national scale. Budget 2026 can accelerate this by linking AI skilling, secure data infrastructure, and cloud readiness to the way GCCs are actually being built today as human + AI teams. If policy keeps pushing workforce readiness and trusted digital infrastructure, India won’t just attract more GCCs, it will attract higher-value mandates: platform engineering, data, security, and AI-led operations,” said Piyush Kedia, CEO, InCommon.

GCCs are creating a value differentiation by transitioning from lower cost centres to high value locations.

Vinodh Nagarajan, Director – Accounting and Tax, Curriculum Associates India, noted that last year’s announcement of the National Framework for Global Capability Centres was an important signal that India views GCCs as a structural driver of economic growth, not just an outsourcing construct.

He noted, “As Budget 2026 approaches, the priority must be to convert that intent into action by finalising a framework that offers global enterprises clarity, consistency, and long-term policy confidence.”

This would mean greater predictability on tax and regulatory issues, whereby GCCs could focus on driving innovation rather than meeting compliance requirements.

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Edited by Jyoti Narayan