Indian IT Doesn’t Want Sops. It Wants Clarity From Budget 2026

With the Union Budget 2026 around the corner, India’s IT services industry is signalling that its priorities lie in regulatory and policy clarity rather than tax concessions. 

Industry players argue that unresolved gaps between tax law and modern digital delivery models are increasing litigation risk, complicating cross-border operations and distorting contract pricing. Cloud computing, remote software delivery, and globally distributed workforces now define how technology services are produced and sold, yet India’s tax and incentive frameworks remain anchored in older, asset-heavy, and location-centric assumptions.

Economic Levies

One of the key areas of concern for industry bodies such as Nasscom is the Significant Economic Presence, or SEP, framework. Introduced to tax non-residents earning digital revenues from India without a physical presence, SEP applies when a foreign company earns ₹2 crore or more annually from Indian transactions or regularly engages with at least 3 lakh users. Although the framework has been in effect since FY22, the rules for attributing profits to such presence remain unnotified. 

“Attribution of profits is a complex issue wherein diverse methodologies are followed by tax officers, leading to uncertainty for taxpayers,” it said in its pre-budget memorandum submitted to the Ministry of Finance. 

The industry body has recommended objective attribution parameters, clarity that payments already classified as royalty or fees for technical services fall outside the SEP framework, and a nominal 0.1% withholding tax where income becomes taxable solely due to SEP.

Similarly, Special Economic Zone rules, originally designed for capital-intensive models, are increasingly out of step with modern IT operations. 

Nasscom said for the “third block of years 11–15, units must transfer a portion of profits to a reinvestment reserve and utilise that reserve to acquire new plant and machinery within three years.” 

“This construct reflects an earlier manufacturing-led model in which capacity was built through owned physical assets,” it added.

However, it contrasted with the ground reality, stating that a large share of SEZ activity now comprises IT and IT-enabled services. “These enterprises build and scale capacity through digital infrastructure and workforce capability rather than heavy machinery.”

Nasscom has suggested expanding the scope of permissible SEZ reinvestment reserves to include cloud infrastructure, software subscriptions, leased technology assets, and training expenditure, ensuring incentives align with current business realities.

Tax Equilisation

Cross-border employee mobility has also emerged as a point of friction. 

In secondment arrangements, employees remain on the payroll of foreign group entities but temporarily work for Indian group companies, which reimburse their salaries. 

Authorities sometimes withhold tax under Section 195 of the Income Tax Act, creating double taxation and unnecessary compliance burdens, particularly for IT services firms and global capability centres. Nasscom has sought clarification to ensure these reimbursements, already taxed as salaries under Section 192, are not treated as fees for technical services. 

Permanent establishment and cloud services add another layer of complexity. To address recurring disputes, the industry body recommends closer alignment between domestic law and tax treaty provisions, so that treaty definitions of permanent establishment take precedence where applicable. 

The industry body has also sought clarity that standard hosting or colocation services provided by Indian data centre operators do not, by themselves, create a business connection or permanent establishment for foreign cloud service providers, provided transactions are conducted at arm’s length. 

Meanwhile, ambiguity around the deductibility of Employee Stock Option Plan (ESOP) costs for employers persists. While courts generally recognise ESOPs as compensation, the absence of an explicit statutory provision has led to recurring litigation. Nasscom has called for a statutory clarification under Section 37 to allow recognition of ESOP costs as compensation to be claimed as deductible business expenditure.

AI And Tech Focus

Beyond regulatory and tax clarity, industry leaders are also urging the government to bolster India’s AI and technology capabilities. 

Sridhar Mantha, CEO of Generative AI Business Services at Happiest Minds, tells AIM that the sector seeks policy stability amid uncertain global demand. Calling it a primary expectation, he says, “Granting of infrastructure status to data centres would unlock long-term, low-cost financing and streamline credit access.”

Mantha also emphasises expanding production-linked incentive (PLI) schemes to cover software products and deep-tech hardware. 

“By formalising these policies, the government can help the sector transition from a service-provider model to a high-value technology hub, ensuring that Indian firms remain resilient even if global corporate tech spending fluctuates.”

On emerging technologies, he calls for government support for high-performance computing infrastructure and a sovereign AI stack, including indigenous large language models. 

To reduce tax disputes, he suggests introducing a safe harbour regime for AI exports and providing greater flexibility in Foreign Tax Credit rules to prevent double taxation as Indian firms expand overseas. 

“Providing Foreign Tax Credit (FTC) flexibility is vital. As we expand our global footprint, we need to ensure that taxes paid in international markets can be efficiently offset, preventing the double taxation that hampers our ability to compete on price and margin in the US and European markets,” he notes.

He further stresses introducing a unified Global Capability Centre policy, clear Digital Personal Data Protection transition timelines, and simplified labour code compliance.

Deloitte partners Peeyush Vaish and Madhava Yathigiri echoed similar concerns. In a report titled ‘Budget Expectations’, they noted that AI, GenAI, and automation are disrupting traditional IT/ITES delivery models, compressing margins and increasing reskilling costs. They recommended reducing Safe Harbour margins under Rule 10TD to reflect these new economic realities and creating a separate category for AI-enabled services. 

“These measures will help maintain India’s competitiveness as a global outsourcing hub while providing much-needed relief to taxpayers navigating the AI transition,” they noted in the report.

They also proposed streamlining Advance Pricing Agreements (APA) and Mutual Agreement Procedure frameworks for simplifying taxation. They 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.

Meanwhile, PwC, in the Union Budget 2026 expectations report, noted that technology companies expect Budget 2026 to reinforce India’s evolution from a digitisation-led services economy to a global hub for AI-led services, product engineering, digital exports, and technology manufacturing.

This includes strengthening AI enablers such as compute access, cloud infrastructure, and utilities, providing clearer policy support to move GCCs up the value chain into high-end engineering and R&D roles, ensuring continuity and faster execution in PLI schemes, and offering guidance on responsible AI, cloud, and cross-border compliance.

“AI growth in India is constrained by a lack of data centres and utility resources, so any budget allocations that ease infrastructural bottlenecks will allow organisations to fill this gap,” the report noted.

Such measures, the consultancy said, would position India not merely as a cost-competitive IT services destination but as a value-creation and productivity-driven technology hub.