Cloud Accounting & Data Localization: Navigating India’s Financial Compliance

Created By : Anurag Taneja

Over the past few years, Indian businesses have increasingly adopted cloud technology to optimize processes and increase efficiency. Yet, this increased use of digital platforms has raised concerns regarding data security, regulatory compliance, and business continuity. Protecting sensitive financial information from unauthorized access, breaches, and system failures has become a top priority. While cloud-based accounting solutions offer efficiency and agility, they also raise concerns about regulatory compliance, data security, and business continuity. The question is—is your business ready to navigate this compliance shift?

The Game-Changer: MCA’s Mandate on Data Localization

Recognizing these issues, the Ministry of Corporate Affairs (MCA) brought in, via a 5th August 2022 notification, the Companies (Accounts) Fourth Amendment Rules, 2022. The amendment makes it obligatory for companies employing bookkeeping software to have daily copies of their books of account and connected documents on a local Indian server physically. Furthermore, organizations using cloud accounting software are also required to reveal certain information, such as:

• The name and address of their service provider
• Internet Protocol (IP) address of service provider
• The name and address of the individual who is in control of the books of account and other books and papers in India. (if service provider is outside India).

This requirement, which became effective on 11th August 2022, is a major change in the way financial data has to be managed and stored by businesses to enable audit trails and logs, ensuring transparency, preventing unauthorized access, and ensuring compliance with India's data localization laws.

Compliance and Data Localization Challenges

Although these initiatives seek to further secure data, they do present a number of challenges to businesses, especially those that depend on international cloud services and accounting programs like Sage Intacct, Oracle NetSuite, SAP SE, Xero, etc. since most of these software platforms do not automatically present possibilities for hosting financial data on Indian local servers for maintaining their financial records, creating compliance challenges in accordance with the new regulations.

On the other hand, most popular accounting software solutions in India such as Zoho Books, Tally Prime have now become cloud-based ERP solutions that provide automated data backup within India's sovereign borders without any need for manual intervention. But for businesses using non-compliant global platforms, this regulatory change requires considerable infrastructure investments, customized integrations, or alternative storage solutions to comply with India's data localization requirements.

Think Your Cloud Accounting Is Secure? Think Again! India’s Data Localization Rules Are Changing the Game.Contact us to know more

The Compliance Dilemma: Challenges for Businesses

• Uncertainty in Documentation Requirements

The amendment does not state clearly what documentation is needed to comply. Businesses find it difficult to identify which systems and records are included under the definitions of "books of account" and "books or papers"—for instance, invoices, payroll information, and other financial documents. Companies that are already using global servers have to reconfigure their infrastructure, resulting in huge cost implications.

• Disjointed Software Platform and Complexity of Data Management

Numerous companies function across several software packages in order to handle different business functions. In addition to core accounting software, organizations use third-party solutions to handle payroll processing, employee database management, and business record-keeping. Merging information from multiple sources contributes to the chaos making it a dauting task and rendering compliance very challenging without a well-defined infrastructure

Data Storage in India: A Costly Mandate or a Strategic Advantage?

Existing Methods of Storing Data in India

Earlier, Indian financial sector companies would often copy information from parent company servers to Indian cloud servers to address backup needs. This proved to be exceedingly complicated, expensive, and disruptive to day-to-day operations. In extreme cases, companies even turned to daily manual backups, against the regulatory mandate for automating the backup process.

How Are Cloud Providers Responding?

Transitioning from global cloud services to localized storage means businesses must either reconfigure existing infrastructure or adopt compliant software like Zoho Books and Tally Prime, which now offer built-in cloud-based ERP solutions with automated data backup in India.

With the advent of these new regulation rules, a few international ERPs have also made strategic realignments to support Indian regulatory needs. For example:

• Microsoft Dynamics now maintains its data inside India's Microsoft Azure data centers (Pune region).
• SAP SE announced the expansion of its cloud offerings in India in October 2023, with SAP S/4HANA Cloud, SAP Business Technology Platform, SAP SuccessFactors, and SAP Ariba hosted within India's sovereign borders.
• Oracle NetSuite, in February 2025, announced its growth of the global data center network with the launch of Oracle Cloud Mumbai Region and Oracle Cloud Hyderabad Region. With this growth, Oracle indicated that "NetSuite is now running in 16 OCI regions across North America, Europe, and Asia-Pacific."

Need for Further Clarifications from the MCA

Despite such developments, there is a requirement from the MCA to specify clearly the requisite retention period to keep books of accounts on Indian servers. With the huge infrastructural investment involved, especially in the case of firms that have their financial records stored on parent entity servers outside India now, clear guidelines on compliance requirements are crucial.

Moreover, companies also ask for more categorical clarity regarding what are "books of accounts" and "books or papers" according to the regulation. It is especially so since most of these records are already in the government's possession through various obligatory statutory compliances such as income tax returns, GST returns, ESI and EPF records, statutory audits, and MCA filings. A clear-cut classification would enable companies to streamline compliance activities, prevent duplication, and maximize infrastructure investments needed for data storage in India.

Non-Compliance: What’s at Stake?

As per the terms of section 128 of the Companies Act 2013, in case the company does not abide by the prescribed data backup and localisation requirements, the person appointed by the Board to ensure compliance might be levied a fine of no less than ?50,000, which could go up to ?5,00,000. Moreover, the auditors have an obligation to report such non-compliance under the provisions of section 143(3) of the Companies Act, 2013, dealing with the maintenance of proper books of accounts by the company. This puts more scrutiny on such companies that do not comply with the regulation, leading to potential reputational risks and regulatory action.

Though no prosecutional sanctions are directly described for non-adherence, the government views this as a sensitive topic because it involves digital security and data governance. With increased focus on cybersecurity and digital infrastructure, businesses have to take active steps to comply in order to escape possible legal and operational consequences.

Moving Forward: How Can Businesses Prepare?

Though the Companies (Accounts) Fourth Amendment Rules, 2022, are intended to enhance security and ease of access of financial information, companies have to deal with substantial operational and financial hurdles that accompany the progress.

Audit Your Current Cloud Infrastructure:

Identify where your financial data is stored and whether your existing provider offers local hosting in India.

Consult Compliance Experts:

Stay updated on MCA’s evolving guidelines and best practices for maintaining financial records. Reach out to our compliance experts at AKM Global today!

Invest in Compliant Cloud Solutions:

Transition to software solutions that align with India's data localization mandates.

Implement a Backup & Security Strategy:

Ensure daily automated backups on Indian servers while maintaining robust cybersecurity measures.

As India is shifting towards stricter data localization regulations, companies need to review their present infrastructure for data backup and consider more practical & conceivable solutions for complying with regulatory requirements. Additional guidance by the MCA on retention and documentation policy will be important to assist companies in coping with this changing regulatory environment, ensuring compliance as well as business efficiency.

Moreover, in a broader aspect, this effort is in line with the vision of the Prime Minister for Make in India and Digital India, and it augments technological progress and data management self-reliance. Companies can expect more such forward-looking developments that catalyse innovation and regulatory sync in Indian finance.