Vinita Chakrabarti & Vaishali Amin – [2026] 183 taxmann.com 226 (Article)
1. Introduction
In an economic landscape defined by heightened geopolitical uncertainty, and rapidly evolving global value chains, the Union Budget 2026 marks a pivotal moment for the country’s transfer pricing (TP) framework. The proposals span a wide spectrum — from a comprehensive recast of the Safe Harbour (SH) rules to a more streamlined and time-bound Advance Pricing Agreement (APA) regime, as well as long-needed clarity on assessment timelines and the codification of the 60 day rule. Collectively, these measures illustrate the Government’s intent to upgrade TP administration and better align it with global developments. The reforms are particularly relevant to India’s IT/ITES industry and expanding Global Capability Centres (GCCs), that have consistently sought tax certainty and simplification in operational and compliance processes. This article explores the key TP amendments introduced through the Finance Bill 2026 and analyses their practical ramifications for multinational enterprises operating in India.
2. A New Era for the Safe Harbour Regime
2.1 Unified Approach – Integrating ‘IT Services’
The Honorable Finance Minister in her Budget speech 2026, proposed significant revisions to India’s SH Regulations, with a particular focus on the ‘IT services’.
The SH Regulations, first introduced by the Central Board of Direct Taxes in 2013 (Rules 10TA to 10TG of the Income tax Rules, 1962), were envisioned as a dispute mitigation mechanism. Under this framework, tax authorities agree to accept the transfer price declared by taxpayers for specified international transactions, provided certain pre-defined conditions are met. This mechanism aimed to reduce litigation, lower compliance burdens and provide much needed certainty by limiting exhaustive documentation requirements.
The SH Regulations primarily cover standardised transactions such as software development services, IT enabled services (‘ITeS’), knowledge process outsourcing (‘KPO’), Contract Research & Development (R&D) in software and pharmaceuticals, manufacturing and export of core/non-core automotive components, corporate guarantees, intra-group loans and low value adding service.
Over time, the regime’s perceived higher margins and the complexity of service classifications limited its attractiveness and consequent adoption by taxpayers. Recognising these challenges, the Government rationalised margins and increased thresholds nominally in 2017, broadening the scope to make the regime more relevant and accessible, particularly for smaller taxpayers. Despite these efforts, the uptake remained modest, as stakeholders continued to seek lower SH rates, broader eligibility and higher thresholds to truly unlock the framework’s potential for reducing disputes and easing compliance.
Taking into account various recommendations made through industry bodies and forums, Finance Bill 2026 proposals have decisively addressed longstanding industry concerns by introducing sweeping reforms to the SH Regulations.
Most notably, Finance Bill 2026 has proposed a uniform consolidated SH margin of 15.5% covering multiple categories, i.e. ITES, KPO, software development services, contract R&D relating to software development services, significantly lower than the originally prescribed rates ranging from 20 to 29 % (2013 to 2016), which were later reduced to 17% to 24% (2017 onward), coupled with a major increase in the eligibility threshold from INR 300 crores to INR 2,000 crores. Furthermore, allowing taxpayers to opt for the same SH margin for up to five consecutive years brings a level of certainty and stability that the industry has long been seeking.
These changes are set to eliminate much of the ambiguity surrounding the classification of IT, ITeS and KPO services, streamlining the framework for taxpayers. As a result, SH is poised to become a genuinely viable option for a far broader spectrum of mid-sized and even large IT service providers.
Equally transformative is the introduction of an automated, rule-based approval mechanism, which removes the need for scrutiny or acceptance by a tax officer.
2.2 New Category Introduced – Data Centre Services
India continues to rank among the highest in AI adoption across the Asia-Pacific region, and its data-centre capacity is projected to triple to nearly 4.5?GW by 2030. With abundant datasets, a large and digitally engaged population, and deep engineering talent, India is strongly positioned to scale AI and cloud infrastructure. This potential has already been recognised by global technology leaders—Amazon and Microsoft which announced huge investments totaling to approximately US$52?billion in next 4 to 5 years, further accelerating India’s transformation into a hyperscale digital infrastructure hub.
Acknowledging this momentum and the need to attract global investment while strengthening critical digital infrastructure, the Finance Bill 2026 placed significant strategic emphasis on positioning India as a global centre for cloud, AI, and hyperscale data centre capability. In line with this objective, the Budget introduced a 20 year tax holiday (until 2047) for foreign companies offering cloud services globally, provided such services are delivered through data centres located in India and Indian customers are served through a domestic reseller entity.
These proposals have been positively received by industry bodies and taxpayers, who believe they will additional have/generate a multiplier effect on the economy. To illustrate, the sentiment echoed by Nvidia CEO Jensen Huang, who praised the policy direction and highlighted its broader economic impact, noting that large scale development of data centres in India could replicate the internet era job boom by creating extensive upstream and downstream employment opportunities.
The Finance Bill 2026, further to achieve transfer pricing certainty proposes a 15% safe harbour margin, by introducing a newcategory under the SHR for cloud-linked data-center services rendered to overseas AE(s), where the foreign enterprise uses those services to provide cloud solutions to international customers.
2.3 Positive Boost to Home-Grown Accounting and Advisory Firms
It is proposed to rationalise the definition of ‘accountant’ for the purposes of SH Regulations, thereby enabling more local firms to issue certificates as required under these regulations.
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