Budget 2026: Indian IT Calls Safe Harbour Reset Timely for Tax Disputes

In the Union Budget 2026–27, finance minister Nirmala Sitharaman announced consolidating software development, IT-enabled services, knowledge process outsourcing, and contract research and development into a single “Information Technology Services” category. This segment will enjoy a uniform 15.5% safe harbour margin, which has drawn strong support from IT industry leaders and tax experts.

Sitharaman said the overhaul is intended to reduce litigation, simplify compliance, and provide faster resolution of transfer pricing matters.

The government raised the safe harbour eligibility threshold from ₹300 crore to ₹2,000 crore, allowed companies to remain under the regime for five consecutive years, introduced automated approvals without officer scrutiny, and committed to fast-tracking unilateral Advance Pricing Agreements (APAs) for IT services, targeting closure within two years, with a six-month extension available on request.

Safe Harbour Rules under Section 92CB of the Income Tax Act provide automatic acceptance by tax authorities for certain international transactions (like IT/ITES, R&D, etc) to reduce transfer pricing disputes and audits.

Rajesh Varrier, president – global operations & chairman and managing director, Cognizant India, says that the Budget sends a clear signal that India is doubling down on its role as a global technology and services powerhouse.

“The recognition of IT services as a unified category, along with enhanced safe-harbour thresholds, brings much-needed certainty and predictability to the industry—allowing companies to shift their focus from compliance to innovation, client outcomes, and long-term value creation,” he tells AIM. 

Aparna Iyer, senior VP and CFO, Wipro, agrees. “The proposals, such as combining IT services and R&D Services into a single bucket, increasing the threshold limit for safe harbor and providing a two-year timeline for conclusion of unilateral APAs, will provide tax certainty and reduce the cost of compliance for companies operating in the sector.”

Meanwhile, Venkatraman Narayanan, managing director of IT services company Happiest Minds Technologies, notes that the Budget focused on long-term value creation through sustained investments in physical, digital and knowledge infrastructure. He adds that the above-mentioned provisions improve ease of doing business and policy predictability, strengthening India’s position as a base for digital and AI-led services. 

Global Focus

Ahead of the Budget, industry body Nasscom had sought clarity that standard hosting or colocation services offered by Indian data centre operators, fearing that it would create a permanent establishment for foreign cloud service providers.

The finance minister, in her Budget speech, said that any foreign company providing cloud services to global customers using data centre services from India will be eligible for a tax holiday till 2047.

Sindhu Gangadharan, chairperson of Nasscom and managing director of SAP Labs India, says the Budget strengthens the policy framework required for India to operate as a global technology and AI execution hub. He notes that the focus on cloud infrastructure directly addresses constraints in scaling enterprise platforms that handle regulated, data-intensive workloads.

Meanwhile, Gaurav Vasu, founder and CEO of cognitive intelligence platform UnearthInsight, highlights that raising the turnover threshold to ₹2,000 crore will bring a significantly larger set of IT exporters into a predictable tax framework. 

He also points to five-year continuity and automated approvals, which may reduce ongoing compliance friction, while the faster APA timelines can improve certainty for IP-intensive and platform-led IT delivery models.

Easing Regulatory Liability

In the days leading up to the Budget, Nasscom had also proposed streamlining APAs and Mutual Agreement Procedure frameworks for simplifying taxation. It had recommended expanding APA capacity, prescribing fixed timelines for routine transactions, standardising data requirements, widening the scope of bilateral APAs for overseas permanent establishments, and allowing single-owner US LLCs to access treaty benefits.

APAs aim to prevent transfer pricing disputes and increase certainty.

The industry body said in a statement that these targeted measures will deliver long-sought clarity and certainty in international taxation and transfer pricing.

On expanding the safe harbour eligibility threshold, it said the move significantly widens access for Indian IT and ITES providers.

“Importantly, the proposal to move Safe Harbour approvals to an automated, rule-driven process without examination by tax officers, along with the option to apply the same Safe Harbour for a continuous five-year period, represents a decisive shift away from process-heavy compliance towards clarity, predictability, and trust-based governance,” it said.

The industry body also welcomed the fast-tracking of unilateral APAs for IT services, with an endeavour to conclude cases within two years and a limited extension window, noting that extending the modified return facility to associated entities would support smoother implementation and reduce residual disputes.

Fatema Hunaid, Asia-Pacific transfer pricing leader at Grant Thornton Bharat LLP, says the enhancements to the safe harbour framework are expected to reduce litigation and improve ease of doing business. She also highlights the reduction in margins for contract R&D services from 30% to 15.5%, noting that it aligns with productivity changes driven by accelerated AI adoption.