Union Budget 2026: Focus on Transfer Pricing Certainty and Growth

The Union Budget, as presented in the Parliament on 1 February 2026 by Finance Minister Nirmala Sitharaman, focuses on tax certainty and growth. The theme of the Budget revolved around several vital tax policy reforms, such as simplifying compliances, reducing litigation, and strengthening India's attractiveness as a global business as well as a digital hub. This article aims to summarise some of the key Transfer Pricing (TP) proposals targeted at reducing potential cross-border transactional disputes and bringing certainty for companies operating in the IT services sector.

Safe Harbour Regime has been prevalent among Indian taxpayers and is known for bringing certainty through a comparatively less complex procedure. While the varied nature of IT services with different Safe Harbour rates was always part of the existing regime in India, one of the significant tax proposals relates to the introduction of 'single unified category for IT services', which should include software development, IT-enabled services, knowledge process outsourcing, contract R&D related to software, etc. It is proposed that this unified category of IT services under the Safe Harbour regime would now seek a uniform Safe Harbour margin of ~15.5% on its costs, which replaces the earlier segmented margins.

In addition to the uniformity applied on IT services, the Budget has also proposed to substantially raise the revenue linked eligibility threshold from INR 300 Crore to INR 2,000 Crore. This, of course, expands the benefit of the Safe Harbour regime to a large number of IT players. The icing on the cake comes with a proposal to simplify the approval process on Safe Harbour applications, by automating the approval and increasing the validity for 5 years, thereby reducing delays and discretionary tax officer involvement.

Further, with its objective of simplifying the compliances and bringing certainty in transfer pricing dispute resolution, the Government seems to be taking the right steps in its Advance Pricing Agreement (APA) programme as well. The Budget proposes to streamline the unilateral APA process with a target completion timeline of about two years, aiming at faster completion of APAs. Another positive initiative supported in this year's Budget relates to the foreign associated enterprises' challenge of claiming any refund of any additional taxes paid or withheld, while the Indian taxpayer was always able to take effect of the revised arm's length price, by furnishing their modified tax returns subsequent to APA conclusions. The Budget now proposes to let such foreign associated enterprises furnish their modified tax return, just like APA applicants, so that such foreign companies can also claim their refunds of any additional taxes paid or withheld.

The above mark a major expansion of transfer pricing certainty for corporates operating in India. Beyond transfer pricing, the Budget introduced several other noteworthy tax measures such as tax holiday and digital economy boost, positioning India as a competitive destination for digital services, Global Capability Centres, and global cloud operations.

The Budget proposals, including some of the key proposals summarised in this article, reflect a shift towards a trust-based tax regime, balancing taxpayer certainty with robust compliance discipline, and are likely to have lasting implications for investors and multinational enterprises operating in India.

Source: Taxmann