India’s TP reset for the digital economy: safe harbour and APA reforms

India’s technology sector sits at the heart of its export economy, and transfer pricing sits at the heart of how that export engine is taxed. Cross-border intercompany transactions that are operationally routine have often been treated as administratively complex, leading to repeated disputes over entity categorisation, arm’s-length margins, and comparability. The process has been familiar to many multinationals and in-house teams and has resulted in significant time and cost for taxpayers in defending stances.

The India Union Budget 2026 safe harbour reforms focus on redesigning the regime for the IT sector as a tax certainty toolkit for taxpayers. The advance pricing agreement (APA) programme continues to expand in volume and bilateral reach. Compliance entry points are being consolidated into simpler forms. And all of this is unfolding as India transitions to the Income-tax Act, 2025 and the Income-tax Rules, 2026, which reset statutory references and compliance architecture from April 1 2026.

The case for certainty is strongest where cross-border volume is persistent and repeatable. Officially cited industry figures put India’s IT sector at an estimated $283 billion in FY 2024–25 with exports of $224 billion, compared with $118 billion and exports of $100 billion in FY 2014–15.

These numbers are not merely macroeconomic context. They explain why transfer pricing administration for technology services has to work at scale. When an industry becomes that large, a system that relies on prolonged audit cycles for routine profiles creates friction that is difficult to justify on policy or administrative grounds.

The key changes under the Income-tax Rules, 2026 appear to be an attempt to separate the routine from the complex. Where services are low risk and standardised for IT, the aim is to create a rules-based route that reduces administrative interface. Where transactions are complex or treaty coordination is needed, the APA and mutual agreement procedure programme remains the pathway. The intended outcome is not the elimination of disputes but the reduction of avoidable disputes in areas where the risk and complexity are relatively limited.

Safe harbours in India were introduced to reduce transfer pricing litigation by offering predefined outcomes when specific conditions are met. Yet, in the IT segment, adoption was not always commensurate with the size of the sector. Safe harbours were not widely opted for by taxpayers due to structural fragmentation, low eligibility thresholds, and higher mark-up rates. Overlapping services were split into multiple categories, such as software development, IT-enabled services, KPO, and contract R&D, with prescribed profit margins ranging from 17% to 24%.

The most consequential transfer pricing change for the technology sector under the new Income-tax Rules, 2026 is the redesign of the safe harbour corridor for IT services.

The technology service segments have been consolidated into a single “Information Technology Services” category with a uniform 15.5% margin, and the eligibility threshold has been increased from INR 3 billion ($30 million) to INR 20 billion. This move has two practical effects.

First, it recognises how the sector operates. By consolidating service segments, it reduces the compliance burden associated with debating labels within a set of inter-connected services that are delivered through common teams, shared cost pools, and blended capability models. Second, by raising the threshold materially, it signals that the safe harbour is not intended as a small-taxpayer exception. It is intended as a mainstream certainty corridor that can be used by mid-sized and larger operating models in the technology and global capability centre (GCC) ecosystem.

Second, and more important, is the procedural aspect of introducing a more system-driven and automated framework that reduces the need for detailed scrutiny and administrative interface.

The introduction of a 15.5% safe harbour rate is particularly significant for GCCs in India, and it deserves attention because of how it reshapes their tax landscape.

GCCs set up by multinational companies to handle functions such as IT, finance, analytics, and increasingly strategic roles have been evolving rapidly in India. Many are no longer just cost centres; they now house regional and even global leadership roles, with Indian teams taking ownership of high-value, decision-making functions.

The evolution in the functions of GCCs has led to frequent disputes and prolonged litigation, especially when benchmarking profit margins. By allowing eligible GCCs to opt for a predefined margin of 15.5%, it provides certainty on acceptable profit levels, reducing the need for extensive benchmarking analysis and defending positions during audits. The safe harbour regime helps manage this ambiguity by offering a clear, litigation-free pathway, provided the entity meets the prescribed conditions.

Overall, the new safe harbour rules are expected to reduce tax litigation and the administrative burden, enhance predictability in transfer pricing outcomes, and support the continued expansion of GCCs in India, especially as they move up the value chain.

An Indian entity rendering IT services to an associated enterprise can elect the safe harbour route where it fits the “insignificant risk” profile, with the election designed to operate over a block of five tax years. The opt‑in is made through Form No. 49, filed for IT services, and the decision is processed through an automated, rule‑based mechanism for the five-year block. The process also allows the taxpayer to cure defects before any rejection, with the outcome to be communicated within the stated timeline after the option is exercised.

There is a clear filing window for IT services, permitting Form No. 49 to be filed up to November 30 of the financial year immediately succeeding the first tax year in the five‑year block. For the remaining years, the procedure provides for a continuing compliance touchpoint through an annual statement for the subsequent years, and while withdrawal is permitted within a limited window, re‑entry is restricted for the balance of the five‑year period covered by the original application.

The amendment in the Income-tax Rules, 2026 introduces a new category beyond IT services into digital infrastructure, with a prescribed mark-up of 15% on operating costs. The inclusion of this category reflects that data centres play a critical role in supporting services such as cloud computing, data storage, AI, and large-scale digital platforms.

To strengthen India’s infrastructure and attract global investment in data centres, a tax holiday until 2047 has been proposed for foreign companies providing cloud services to global customers using data centre infrastructure located within India, provided that such companies deliver services to Indian customers only via an Indian reseller entity.

This extended holiday is likely to enhance investor confidence and position India as an attractive global destination for investment in cloud computing and digital services. Since the tax benefit mainly applies to services provided to global customers, India could become a base for exporting cloud services worldwide.

Indian reseller entities will act as intermediaries between foreign cloud service providers and Indian customers, enabling them to build expertise in cloud solutions and strengthen the domestic cloud services market.

The OECD’s transfer pricing guidance on intra‑group services for low value‑adding services suggests a uniform safe harbour mark‑up of 5% on the relevant cost pool, and the organisation notes that this mark‑up does not need to be justified by a benchmarking study. The same instinct is visible in newer OECD work on distribution activities. Under pillar one, amount B introduces a simplified and streamlined approach to applying the arm’s-length principle to in‑country baseline marketing and distribution activities, and the OECD has incorporated the report’s content into its transfer pricing guidance.

Several jurisdictions have also pursued their own domestic simplification tools, sometimes through formal safe harbours and sometimes through record‑keeping concessions that function similarly in practice. Section 1.482-9T(b) of the US Treasury Regulation permits the services cost method for controlled service transactions to be priced at cost, with no mark-up. To qualify, the taxpayer must be able to support, based on reasonable business judgement, that the service is not a meaningful driver of the controlled group’s competitive edge, core operational capabilities, or the key risks that determine business success or failure.

Australia’s Practical Compliance Guideline 2017/2 is another example. It sets out simplified transfer pricing record‑keeping options for several low‑risk categories, including low value‑adding intra‑group services, and is structured around eligibility criteria, exclusions, and reduced documentation pathways.

The Inland Revenue Authority of Singapore (IRAS) permits a 5% cost‑plus mark‑up for qualifying routine support services and accepts the OECD simplified approach for low value‑adding services, again aiming to ease the compliance burden where the activity is not core or entrepreneurial. For a related-party domestic loan entered into on or after January 1 2025, if the lender and borrower of a related-party loan are both taxpayers in Singapore and neither of them is in the business of borrowing and lending, the taxpayers can apply the IRAS’s indicative margin to derive the interest rate, regardless of the amount of the loan.

India’s recalibrated safe harbour for IT services fits neatly within this global arc of simplification. That said, India’s safe harbour remains a unilateral construct. Unlike approaches designed to be adopted across jurisdictions, unilateral safe harbours can still leave taxpayers exposed to double taxation if the counterparty jurisdiction does not accept the same margin outcome.

The 2026 tax changes propose modifications to the APA programme designed to facilitate APA applications for transactions in the IT sector.

For unilateral APAs relating to IT services, a special accelerated timeline is proposed, wherein a target has been set to conclude unilateral APAs within two years from the end of the quarter in which the application was submitted, with a further extension of six months available upon request. This measure is intended to enhance the effectiveness of the APA by ensuring that taxpayers receive timely certainty regarding their transfer pricing arrangements.

APAs remain the pathway for taxpayers that want tailored certainty, particularly where fact patterns are complex or treaty coordination is necessary for a bilateral APA.

India’s APA programme has reached a milestone of 219 APAs in FY 2025–26, taking the cumulative total since inception to 1,034 APAs, comprising 750 unilateral APAs and 284 bilateral APAs.

India’s transfer pricing reforms are best understood as a move from dispute management to certainty design. For IT services, including those set up as GCCs and digital infrastructure companies, the safe harbour corridor has been repositioned. The compliance gateway is being simplified through setting a framework and a defined filing window for IT services elections. In parallel, the APA programme’s record signings and stronger bilateral outcomes reinforce negotiated certainty as a mainstream instrument for complex profiles and double taxation risk.

The practical message for multinational groups is clear. Certainty is becoming cheaper to access, but only for taxpayers that can sustain disciplined governance over their operating model, pricing mechanics, and compliance execution. As the Income-tax Act, 2025 and Income-tax Rules, 2026 become the operating baseline, the winners will be those who treat certainty not as a one-off filing choice but as a multi-year governance discipline.