India Resets Transfer Pricing Framework in 2026 Budget

- The new framework consolidates several categories, including software development, IT-enabled services (ITeS), and knowledge process outsourcing (KPOs), into a single "Information Technology Services" group. This group is now subject to a unified Safe Harbour margin of 15.5%. - To qualify for this new Safe Harbour for IT services, the turnover threshold for eligible international transactions has been significantly increased from ₹3 billion to ₹20 billion. This change is designed to provide certainty and reduce compliance friction for a larger number of tech and service exporters. - The budget introduces a rule-based, automated process for Safe Harbour applications, removing discretionary examination by tax officers. Companies that qualify can lock in their transfer pricing outcome for a period of five consecutive years, a level of predictability previously only available through the more intensive Advance Pricing Agreement (APA) process. - India's transfer pricing regulations were first introduced in 2001 to prevent the erosion of the tax base. Key evolutionary steps included the introduction of the APA program in 2012 and the initial Safe Harbour rules in 2013, aimed at reducing litigation. - An Advance Pricing Agreement (APA) is a voluntary agreement between a taxpayer and the tax authority (the CBDT in India) that determines the transfer pricing methodology for a taxpayer's international transactions for up to five future years. The program also offers a "roll-back" provision, allowing the agreement to be applied to the four previous years, providing up to nine years of tax certainty. - The changes reflect India's ongoing alignment with the OECD's Base Erosion and Profit Shifting (BEPS) framework. India has been an active participant in the BEPS project, adopting measures like the three-tier documentation structure to increase transparency and curb profit shifting by multinational enterprises. - Alongside the Safe Harbour changes, the 2026 budget proposes to fast-track the APA process for IT services, aiming to conclude agreements within two years. This is part of a broader push to improve the ease of doing business and provide a non-adversarial tax regime. - For Certainty, the Finance Act of 2025 introduced a "repeat-transaction" mechanism, effective from Assessment Year 2026-27. This allows a taxpayer to apply the Arm's Length Price (ALP) determined for one year to similar transactions for the following two years, reducing the need for annual assessments.