India is undertaking a major reform of its Transfer Pricing framework through proposed changes to the “safe harbor” rules, as outlined in the 2026 Union Budget, which are still subject to legislative approval. These measures aim to simplify compliance, reduce administrative burdens, and minimize potential disputes between taxpayers and tax authorities.
The proposed reform is particularly relevant for multinational groups operating in the technology sector, including software development, IT services, knowledge management, and other technology-based services. For companies with operations or shared service centers in India, the changes could represent a substantial step toward more streamlined and predictable Transfer Pricing compliance.
Simplification of Safe Harbor Rules for IT Services
One of the central elements of the proposal is the consolidation of all IT services and IT-based services (ITeS) into a single category called “Information Technology Services.” Under this approach, a uniform safe harbor margin of 15.5% will apply. If taxpayers meet this minimum margin, they would generally be accepted under the safe harbor regime.
This measure aims to eliminate the complexity arising from multiple classifications and provide greater certainty to taxpayers engaged in routine service transactions.
Expansion of Scope and Eligibility
The proposed reform also significantly expands the scope of the safe harbor regime. The eligibility threshold for transaction volumes will increase from INR 3 billion to INR 20 billion, allowing medium and large enterprises to benefit from simplified compliance mechanisms.
This expansion reflects a policy shift toward broader access to safe harbor provisions, allowing more taxpayers to reduce compliance risks and administrative burdens.
Digitization and Procedural Efficiency
Another key aspect of the reform is the complete digitization and automation of the approval process. Once approved, the safe harbor regime will remain valid for up to five years, providing greater planning certainty and reducing the need for repeated applications.
In addition, the government has proposed measures to expedite unilateral Advance Pricing Agreements (APAs), particularly for IT service providers. Under the new framework, the goal is for these agreements to be concluded within two years, improving efficiency and reducing uncertainty regarding Transfer Pricing.
New safe harbor provisions for strategic sectors
Beyond IT services, the proposed changes introduce new safe harbor provisions aimed at supporting strategic sectors:
- For investments in data centers, a 15% safe harbor margin on costs is proposed for Indian entities providing services to related parties.
- For electronics manufacturing and logistics, a 2% margin on the invoice value is introduced for non-resident entities regarding the storage of components in bonded warehouses.
These measures are designed to promote investment, improve supply chain efficiency, and support India’s broader industrial and digital development strategies.
Implications for Multinational Groups
If implemented, these reforms will significantly simplify Transfer Pricing compliance for eligible taxpayers, while increasing certainty in the application of the arm’s length principle. The combination of standardized margins, expanded thresholds, and faster procedures is expected to reduce disputes and improve the overall efficiency of the tax system.
For multinational groups, this represents an opportunity to reassess existing transfer pricing policies, particularly regarding transactions related to information technology services, and evaluate whether the safe harbor regime offers a more efficient compliance alternative.
Conclusion
The proposed reform of India’s safe harbor rules reflects a clear move toward simplification, digitization, and greater tax certainty in Transfer Pricing, based on proposals currently under consideration as part of India’s 2026 Union Budget. As the regulatory environment evolves, companies operating in India should proactively review their Transfer Pricing strategies and assess the potential benefits of these new measures.
In this context, TPC Group, a consulting firm specializing in Transfer Pricing with international experience, supports multinational organizations in evaluating their related-party transactions, implementing policies aligned with regulations, and adapting to regulatory changes across different jurisdictions, ensuring effective risk management and compliance with global standards.
Source: Ebnerstolz