Whalesbook
THE SEAMLESS LINK
These proposals arrive as the Indian IT sector navigates a complex global economic climate, with services exports growing robustly but facing potential headwinds. The Nifty IT index, representing the sector's performance, hovered around 38,238.50 in late January 2026. Nasscom's advocacy reflects a strategic effort to ensure the sector's continued competitiveness and attract vital investment.
Accelerating Startup Growth Through ESOP Reform
Nasscom's primary demand centers on expanding Employee Stock Option Plan (ESOP) tax deferment. Currently, this benefit is restricted to fewer than 4,000 startups certified by the Inter-Ministerial Board, despite over 1.59 lakh startups being recognized by the DPIIT. This disparity hinders startups' ability to attract and retain high-caliber talent, crucial for competing with larger corporations. The association advocates for extending these deferment benefits to all DPIIT-recognized entities, coupled with a push to make ESOP costs deductible under Section 37 of the Income Tax Act. This aligns with industry calls for taxation to occur only upon the realization of gains, thereby mitigating upfront cash-flow stress for employees, a persistent issue since the partial relief offered in Budget 2020. The broader Indian IT sector is projected to reach $350 billion by 2026, making talent management a critical factor for sustained growth in an increasingly competitive funding environment.
Clarifying Cloud Taxation for Investment Growth
Beyond startup-specific measures, Nasscom seeks explicit clarification on the tax implications for foreign cloud providers utilizing Indian data centers. The industry body argues that payments made to Indian data center operators for hosting or co-location services should not establish a permanent establishment for foreign entities, as these payments fully cover India-based functions without the provider controlling local premises. This clarity is deemed essential to prevent unintended tax liabilities and encourage global cloud providers to expand their operations in India, a sector poised to significantly contribute to GDP growth. While recent judicial interpretations, such as the Delhi High Court's AWS ruling, have provided some direction, the industry desires definitive policy statements to ensure tax certainty.
Broader Policy Enhancements
Nasscom's pre-Budget memorandum also includes several other critical recommendations. These encompass extending carry-forward of losses and depreciation benefits during mergers and acquisitions to all companies, including those in the services sector. It also proposes greater flexibility in utilizing the SEZ Reinvestment Reserve for investments in leased tech assets and cloud infrastructure. Furthermore, the association suggests reducing the pre-deposit requirement for tax appeals from 20% to 10% of the disputed demand, mirroring GST rules, to alleviate working capital pressures on businesses. Preventing tax refunds from being automatically offset against demands under stay is another key ask, aimed at improving cash flow management.
Future Outlook
The Indian IT sector anticipates continued expansion, with projections indicating revenues of $350 billion by 2026. However, the sector grapples with global economic slowdowns, geopolitical uncertainties, and margin pressures, as evidenced by the mixed earnings reports and slower hiring trends observed in late 2025. The Nifty IT index's Price-to-Earnings (P/E) ratio currently stands at approximately 27.3, reflecting a valuation that analysts suggest warrants a selective investment approach, with a focus on companies leveraging AI and digital transformation. Nasscom's comprehensive set of recommendations aims to provide the necessary regulatory and tax certainty to support innovation, talent retention, and investment, thereby fortifying the Indian IT ecosystem against future economic volatility.