Tax advisory firm PwC has called on the government to bring greater clarity to India’s tax framework for hyperscale data centres, particularly on whether their specialised, purpose-built infrastructure should be treated as plant and machinery or as civil structures for the purpose of claiming Input Tax Credit (ITC).

Highlighting the sector’s integrated nature and its strategic role in India’s digital ambitions, PwC has also raised concerns around depreciation norms, cross-border taxation, permanent establishment (PE) risks and the low threshold under the significant economic presence (SEP) framework, warning that regulatory uncertainty could deter global data centre investments in the country, according to a report by Business Standard.

“In the specific case of co-location data centre service providers, an additional argument can be advanced that construction is not ‘on own account’ where output is the taxable leasing/renting of space, racks, and related infrastructure. Together with the plant-and-machinery carve-out, this supports the position that ITC should be available for such outward leasing supplies,” PwC said.

To boost data centre growth in India, the government should also consider introducing a more favourable depreciation regime, as these facilities are built to optimise the performance and security of digital infrastructure.

Given the cross-border nature of cloud services, the government should also provide clarity around the characterisation of data centres transactions, on whether they fall under the category of royalty to the parent company or will be categorised as a fee for technical services, PwC recommended.

“In a few instances, concerns have been raised that foreign entities may have a PE in India, and therefore, there should be profit attribution. This may expose the non-resident entity to uncertainty around profits taxable in India,” the tax advisory firm said.

Apart from these, PwC has also recommended that the government amend the significant economic presence (SEP) framework, as the current threshold of ~2 crore in revenue or 300,000 users for taxing non-resident enterprises may be too low for data centre companies.

“These areas, particularly the risk of creating a PE and exposure to SEP, are especially salient for overseas players establishing data centres in India, and should be evaluated against India’s broader digital ambition to position itself as a trusted global hub for data infrastructure, cloud services, and cross-border digital trade,” PwC said.