Budgets IT Tax Framework Overhaul To Reduce Litigation

Budgets IT Tax Framework Overhaul To Reduce Litigation, Boost India's Global Hub Status The Union Budget proposes unifying IT service segments under a single tax framework with a 15.5% safe harbour margin Read Time: 3 mins Share WhatsApp Facebook Reddit Email Photo: PTI The Union Budget's proposal to consolidate various IT service segments under a unified tax framework with an expanded safe harbour limit marks a strategic pivot towards a trust-based tax regime, aimed at significantly reducing transfer pricing disputes and compliance friction for multinational corporations, say experts. Industry experts believe the move to automate approvals and offer long-term tax certainty will fundamentally alter the operational landscape for Global Capability Centres (GCCs), encouraging tech giants to deepen their reliance on India as a stable, competitive hub for cloud infrastructure and digital services. Terming the proposal a "decisive shift" away from process-heavy compliance, industry body Nasscom said the changes materially expand access to certainty mechanisms for routine cross-border IT service models."The consolidation of software development services, IT-enabled services, KPO and contract R&D relating to software development into a single category... with a uniform safe harbour margin of 15.5% together with the enhancement of the Safe Harbour eligibility threshold from Rs 300 crore to Rs 2,000 crore, materially expands access to certainty mechanisms," Nasscom said in a statement. The industry body noted that moving approvals to an automated, rule-driven process represents a shift towards "clarity, predictability and trust-based governance," which will significantly reduce recurring transfer pricing friction for GCCs as well as for other Indian IT and ITES providers operating eligible related-party arrangements. Nitin Bhatt, Technology Sector Leader at EY India, said the initiatives will play a key role in shaping the sector's growth."By consolidating multiple IT and IT-enabled service categories into a single definition... and extending this scheme for 5 years provides much-needed long-term certainty and eases compliance obligations.“Additionally, the endeavour to fast-track and conclude the Unilateral APA within a period of 2 years is also a welcome move," Bhatt said. Naveen Aggarwal, Office Managing Partner – Delhi NCR at KPMG in India, termed the government's decision to increase the threshold a "bold step.""Considering IT enabled, software development, KPO and contract R&D services in a broad basket while applying this safe harbour will be a win-win for both the Revenue and taxpayers," Aggarwal said. He added that the enhanced safe-harbour framework is expected to reduce tax litigation risk, providing multinational tech and cloud players with greater operational ease. Legal experts also view the move as a signal of India's intent to remain competitive amidst global headwinds. Kumarmanglam Vijay, Partner and Head of Practice - Direct Tax at JSA Advocates & Solicitors, said the 15.5% margin for IT and ITES exports under safe harbour provisions is likely to give a "major boost" to entrepreneurs wanting to set up IT services and GCCs.