India’s technology industry body Nasscom has urged the government to prioritise tax certainty for the digital economy in the Union Budget, flagging concerns around cloud infrastructure, cross-border digital taxation and employee compensation that it says are beginning to weigh on investment decisions.
Cloud & Digital Nexus
At the top of its wishlist is clarity on the tax treatment of foreign cloud companies that use Indian data centres. Nasscom has warned that the current approach risks treating routine infrastructure usage as creating an additional tax exposure for overseas cloud service providers, even though Indian operators already pay tax on their margins.
“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. However, industry experience shows 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,” the industry body said in its memory regarding asks from budget 2026-27.
The industry body has also sought certainty on the taxation of digital businesses under the Significant Economic Presence framework. While thresholds have already been notified, Nasscom has pointed out that key operational rules are still missing, creating uncertainty for companies providing cross-border digital services into India.
“Significant economic presence thresholds have already been notified and apply from financial year 2021 to 2022 onwards. However, rules for attributing profit to such presence have not yet been issued and the interaction with royalty and fees for technical services provisions has not been clarified. A roadmap that sets out how significant economic presence would fit into India’s profit attribution framework would be helpful. It could also confirm that income already assessed as royalty or fees for technical services would not be counted again for significant economic presence thresholds. This will help avoid double counting and ensure consistency with India’s treaty positions,” it said.
Unlocking Talent
Separately, Nasscom has pushed for changes to the tax treatment of employee stock options, arguing that the current framework sharply limits the usefulness of ESOPs for start-ups trying to attract and retain skilled talent. Although India has over 1.5 lakh recognised start-ups, only a small fraction qualify for ESOP tax deferment due to additional certification requirements.
“Fewer than four thousand of these have Inter-Ministerial Board certification under section 80-IAC, yet this certification is a precondition to qualify for the 2020 employee stock option tax deferment window. As a result, only a very small proportion of start-ups can offer employee stock options without creating a liquidity burden at exercise. Extending the timing relief to all recognised start-ups, either through a simplified and time bound Inter-Ministerial Board track or through a lighter risk-based system, would allow start-ups to attract and retain skilled talent while preserving the total tax payable,” Nasscom argued.
Nasscom has also sought clarity on whether ESOP-related costs are deductible for employers, noting that the lack of an explicit provision continues to trigger litigation despite favourable court rulings.
“There is also continuing uncertainty over whether the employer’s compensation cost for employee stock options is deductible. The fair value of such options is recognised in the accounts as employee compensation and courts, including in the Biocon decision, have allowed deduction. A clear provision under section 37 of the Income-tax Act, 1961 and section 34 of the new Act would align the law with accounting practice and judicial reasoning and remove recurring litigation,” it added.
In addition, Nasscom has asked for the tax deducted at source rate on software royalty payments to be reduced to 2%, in line with rates applicable to films and OTT content, arguing that the higher rate currently locks up working capital for IT services companies.
Beyond these core issues, the industry body has also flagged the need for faster tax dispute resolution, lower pre-deposit requirements for obtaining stays, improved refund processing, simpler TDS reconciliation mechanisms, and broader system-level improvements to reduce litigation and ease compliance for the technology sector.