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Ministry of Finance | Central Board of Direct Taxes (CBDT) | Income Tax Department
During the Union Budget 2026-27 presentation, Finance Minister Nirmala Sitharaman proposed a substantial enhancement of the safe harbour regime for the IT sector. Recognizing that software development, ITeS, KPO, and contract R&D are interconnected, the budget proposes to club these segments under a single category—Information Technology Services. The threshold for availing the safe harbour has been increased more than sixfold, from ₹300 crore to ₹2,000 crore. A common safe harbour margin of 15.5% will now apply to all services within this unified category.
Automated and Long-Term Certainty To reduce administrative friction and litigation, the budget introduces a “hands-off” approval process:
Automated Approval: Safe harbour for IT services will be approved through an automated rule-driven process, eliminating the need for a tax officer to manually examine or accept the application.
Long-Term Continuity: Once an IT services company applies for the safe harbour, it can choose to continue with the same margin for a period of five years at a stretch.
Fast-Track APA: For companies preferring an Advance Pricing Agreement (APA), a new fast-track unilateral process aims to conclude agreements within two years (extendable by six months on request).
What is the “Safe Harbour” regime in the context of Indian IT services? Safe Harbour refers to circumstances in which the tax authorities will accept the transfer price declared by the taxpayer without an extensive audit. By setting a predetermined margin (now 15.5%), the government provides “tax certainty” to companies. If a company’s profits meet or exceed this margin, the tax department agrees not to challenge their international transactions, thereby significantly reducing the risk of prolonged transfer pricing litigation.
Policy Relevance
The enhancement of the safe harbour threshold represents a strategic move to secure India’s status as the world’s “Global Capability Centre” (GCC) hub.
Reducing Transfer Pricing Disputes: By raising the threshold to ₹2,000 crore, the government is providing certainty to much larger multinational entities, which are typically the ones involved in complex, high-value transfer pricing disputes.
Ease of Doing Business: The shift to an automated, rule-driven process is a major step toward “faceless” tax administration, removing the potential for subjective interpretation by field officers and lowering compliance costs.
Supporting High-Value R&D: Clubbing contract R&D with standard IT services under a 15.5% margin simplifies the tax profile for deep-tech startups and global innovation centers operating in India.
Operational Flexibility: Allowing a five-year continuity in safe harbour margins provides global firms with the long-term fiscal predictability required for large-scale investment in Indian human capital.
Relevant Question for Policy Stakeholders: How can the CBDT ensure that the automated “Safe Harbour” system is integrated with the “Digital Farmer ID” or other sector-specific data portals to provide similar tax certainty for AgTech and BioPharma service providers?
Follow the full news here: IT Services Tax Reform