Budget 2026 Introduces Uniform Tax Framework for Overseas Tech Firms in India
In a significant move to streamline taxation and attract foreign investment, the Centre has proposed ending long-standing tax uncertainties for Indian units of overseas technology services firms and global capability centres (GCCs). Finance Minister Nirmala Sitharaman, presenting the Union Budget for 2026-27 on Sunday, announced a uniform profit margin of 15.5% for taxing IT services in the country, replacing the previous system of multiple categories that often led to disputes.
Simplifying Tax Structure for IT Services and GCCs
The new framework aims to provide clarity and certainty to companies operating back-end and technology functions in India, encouraging further investment. "India is a global leader in software development services, IT enabled services, knowledge process outsourcing services and contract R&D services relating to software development. These business segments are quite inter-connected with each other. All these services are proposed to be clubbed under a single category of Information Technology Services with a common safe harbour margin of 15.5% applicable to all," Sitharaman stated in her Budget speech.
Previously, GCCs were categorized into three broad buckets based on their work for parent firms: IT enabled services, knowledge process outsourcing services, and contract R&D services related to software development. Each category attracted different tax rates based on profits, creating ambiguity and frequent tax-related scrutiny.
Key Changes and Threshold Enhancements
The budget also substantially increases the threshold for availing safe harbour for IT services from 300 crore rupees to 2,000 crore rupees. Ritika Loganey Gupta, partner and GCC tax leader at EY India, explained: "Over time, the definition of software enabled work, R&D services work and outsourcing as such has shifted. In the past, these would be contentious and would attract long-drawn tax-related scrutiny. This budget makes it clear for companies looking to set-up GCC in India by making tax processes clearer."
Under the new rule, safe harbour for IT services will be approved through an automated, rule-driven process without requiring tax officer examination. Once applied, companies can continue the same safe harbour for up to five consecutive years. Additionally, the budget proposes to fast-track unilateral advance pricing agreements (APAs) for IT services companies, aiming to conclude them within two years, extendable by six months upon taxpayer request.
Practical Implications and Expert Reactions
Consider a US-based pizza chain operating a GCC in Bengaluru handling IT tasks like billing, supply chain management, and payroll. If the cost is ₹100 and revenue is ₹120, the GCC will be taxed on an assumed profit of ₹15.5, even if actual profit is higher. Similarly, with ₹110 revenue, tax applies on ₹15.5 profit, albeit with a premium.
Experts welcomed the move for enhancing investment certainty. Gupta noted: "The enhanced ₹2,000 crore threshold, automated rule-based approvals, five-year continuity of safe harbour, and expedited unilateral APA timelines significantly reduce audit exposure, compliance complexity, and dispute risk, thereby improving long-term cost certainty and supporting the scale-up of high-value global capability centre operations in India."
Homi P. Ranina, advocate at the Supreme Court of India and tax law specialist, added: "This move was done to create certainties for global firms looking at expanding operations into the country. Tax-related issues would always serve as a hindrance to those companies because they would attract litigation but now there is clarity as a simplified tax regime is introduced."
Potential Limitations and Industry Context
However, some concerns remain. Meyyappan Nagappan, partner of tax practice at Trilegal, pointed out: "The safe harbour margin is likely to further incentivise the shifting of higher value-added tech functions to GCCs in India, as they may likely be within the safe harbour range. While creating an integrated IT/ITeS bucket helps resolve pain points in clearly categorising various GCC activities within the current safe harbour categories, there may still be certain high value strategic and ESG activities which fall outside the IT/ITeS category, the treatment for which remains to be seen."
This development aligns with India's growing appeal as a hub for global tech centres, driven by an abundant pool of skilled talent. According to Nasscom, India hosts over 1,760 GCCs, with Bengaluru and Hyderabad leading with 875 and 355 centres respectively. GCCs generate at least $64.6 billion in export revenue, projected to rise to 2,200 centres by March 2030, valued at $105 billion.
The uniform tax margin initiative is expected to bolster India's position as a preferred destination for technology investments, reducing compliance burdens and fostering a more predictable business environment for international firms.
