Budget Unveils Sweeping Transfer Pricing Reforms to Boost Tax Certainty for MNCs
In a landmark move aimed at transforming India's tax landscape, the Union Budget has introduced comprehensive reforms to the country's transfer pricing framework. These changes are designed to significantly reduce litigation, enhance tax predictability, and position India as a more attractive destination for multinational corporations and global capability centers.
Consolidated Safe Harbour for IT Services at 15.5%
Presenting the proposals, Finance Minister Nirmala Sitharaman announced far-reaching modifications to safe harbour regulations and Advance Pricing Agreements, with particular emphasis on technology-driven sectors. A pivotal reform involves the consolidation of software development, IT-enabled services, knowledge process outsourcing, and contract research and development into a single unified category labeled "Information Technology Services."
This newly created category will operate under a uniform safe harbour margin of 15.5%, replacing the previous system of multiple, often higher, margins that varied across different service types. Safe harbour provisions refer to predetermined pricing margins where tax authorities accept a company's transfer pricing without detailed scrutiny, offering taxpayers certainty and protection from potential disputes.
The consolidation is expected to resolve long-standing classification conflicts and profitability debates that have plagued the IT sector for years. Additionally, the eligibility threshold for opting into the safe harbour regime has been substantially increased from Rs. 300 crore to Rs. 2,000 crore, dramatically expanding coverage to include mid-sized and large IT service providers.
Automated Approvals and Extended Coverage
The budget proposals introduce an automated, rule-based approval process for safe harbour applications, eliminating the need for officer-level examination. Companies will now have the opportunity to secure safe harbour protection for up to five consecutive years, providing extended stability for their transfer pricing arrangements.
"These changes are expected to significantly reduce disputes and compliance burden for many multinational IT companies and global capability centres operating from India," observed Ameya Kunte, founder of Globeview Advisors. He further noted that the reduction in acceptable margins from the earlier 17–18% range to 15.5% represents a substantial incentive for the industry.
Advance Pricing Agreements Receive Major Boost
The budget also strengthens India's Advance Pricing Agreement program, which has shown remarkable growth in recent years. According to Central Board of Direct Taxes data, a total of 815 APAs have been concluded through March 2025, with the 174 agreements signed in 2024-25 marking the highest annual tally since the program's inception in 2012.
APAs function as proactive mechanisms to eliminate prolonged transfer pricing disputes by establishing agreed-upon pricing methodologies in advance between taxpayers and tax authorities. The new proposals specifically target faster processing of unilateral APAs for IT services, with an ambitious goal of concluding cases within two years—extendable by six months at the taxpayer's request.
This represents a substantial improvement over historical timelines that frequently extended beyond three years. Another significant reform permits associated enterprises of APA-covered taxpayers to file modified returns within three months of agreement signing, ensuring alignment of group-level tax positions.
Procedural Simplification and Industry Response
"The amendment provides associated enterprises with a statutory pathway to align their returns with agreed pricing methodologies," explained Rahul Charkha, partner at Economic Laws Practice. "This development may reduce instances of economic double taxation within corporate groups and materially strengthen the effectiveness of the APA programme."
To further curb procedural disputes, the budget replaces the existing 60-day deadline for transfer pricing officers to pass orders with a clearer month-based timeline. This adjustment aims to eliminate interpretational litigation concerning limitation periods that has previously created uncertainty.
Industry experts view this comprehensive reform package as representing a decisive shift toward certainty-driven tax administration. "The expansion of safe harbour provisions, implementation of automated approvals, and acceleration of APA processing reflect a strong policy commitment to simplify compliance and substantially reduce litigation," commented Sandeep Bhalla, partner at Dhruva Advisors.
These strategic reforms collectively signal the government's determination to create a more predictable, efficient, and business-friendly tax environment that supports India's growing role in the global digital economy while addressing longstanding industry concerns about transfer pricing uncertainty.
