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In an era of increasing globalisation and regulatory scrutiny, transfer pricing has emerged as one of the most significant tax and compliance considerations for multinational corporations. For UK groups with affiliates in multiple countries, this means balancing strategic commercial objectives with compliance obligations in the UK and overseas, managing both tax risk and effective cross-border cash flow.
National budget and tax policy announcements play a decisive role. One such recent example is the Union budget 2026-27, which included several transfer pricing-related proposals that exemplify how tax authorities are trying to balance revenue protection with clarity and competitiveness for multinationals operating in their jurisdiction. The budget expanded and rationalised safe harbour provisions, unified service categories under a common safe harbour margin (IT etc.) and streamlined mechanism like advance pricing agreements to reduce transfer pricing and administrative burden for cross-border transactions.
These developments are noteworthy. Not only do they affect pricing strategies and compliance requirements in India, but they also demonstrate the border global trend of transfer pricing simplification, increased certainty, and competition for international investment.
The union budget 2026-27 introduced significant reforms to simplify transfer pricing. The reforms consolidate IT, ITES, KPO and software R&D services under a single category with a 15.5% safe harbour margin for IT services and higher threshold for availing these benefits.
Key Proposals include:
1. Safe Harbour: Applications for IT services (data centres, software development, KPO) will be processed through an automated, rule-driven system, eliminating manual intervention.
2. Increased Thresholds: The transaction value threshold for availing safe harbour for IT services is significantly increased to INR 2000 crore from the previous INR 300 crore.
3. Manufacturing Incentives: A new safe harbour framework for non-resident allows a 2% profit margin on invoice value for component warehousing in bonded warehouses, aiming to reduce disputes and support just in time logistics.
4. TCS Rationalisation: The union budget 2026 introduced a targeted rationalization of Tax Collected at Source (TCS) rates on certain goods rationalising most rates including minerals, scrap, liquor, and tender leaves to a uniform 2% from prior varying rates.
5. Extended Validity: The validity of advance rulings has been extended to enhance ease of doing business.
India has one of the most comprehensive and closely monitored transfer pricing regimes in the world.
Transfer pricing compliance in India is governed by Sections 92 to 92F of the Income Tax Act, 1961. It requires that international transactions and specified domestic transactions with associated enterprises are conducted at an arm’s length. Key obligations contain document maintenance, filing an accountant’s report, and for large multinationals, submitting a country-by-country.
1. Legal Foundations: The core provisions are contained in sections 92 to 92F of the income tax act, supported by rules 10A to 10th of the Income Tax Act, 1962.
2. Documentation rules: Taxpayers must maintain detailed records analysing the transactions and justifying the pricing, which must be produced upon request. Mandatory TP (Transfer pricing) documents is required if the aggregate value of international transactions exceeds 1 crore rupees.
3. Form 48: Under the proposed transfer pricing framework, taxpayers will be required to submit an accountant’s report in Form 48. The new form is expected to introduce a more structured approach to reporting international transactions and demonstrating arm’s length pricing.
Here is the comparison between Transfer Pricings
| Feature | Before Budget (Previous Regime) | After Budget (Effective FY 2026-27) |
|---|---|---|
| ALP Assessment frequency | Assessments conducted every year separately, leading to annual scrutiny | Block/Multiyear Assessment now possible, reducing the frequency of audits. |
| Safe harbour | Characterized by lower thresholds and narrow categories often underutilized. | Wider thresholds and unified margins automated approvals for eligible entities. |
| Compliance Burden | Required extensive annual documentation for every international transaction. | Significantly reduced for taxpayers opting for safe harbour or Block ALP choices |
| APA Processing | Manual and historically slow with cases often pending for 3-4 years | Fast tracked processing specialized cells for key sectors like IT and global capability center (GCCs), targeting 2-year UAPA closure. |
| Dispute & Litigation Risk | Higher risk due to annual revisits and inconsistent interpretations by TPOs. | Lower risk, block assessments and expanded safe harbour provide greater upfront certainty. |
| Procedural Certainty | Ambiguity regarding the exact 60-day limit for TPO orders. | Retroactive clarification on the 60-day computation to prevent time-barred disputes |
The India budget 2026 has had a major effect on UK-India business relations. It provides safe harbour margin for IT/ITES, increases the turnover threshold for safe harbour to INR 2000 crore, and provides a 15% rate for data centre service. Some of the major post-budget impacts:
1. Improved Tax Certainty for IT/ITES: Consolidation of IT, ITES, KPO, and software R&D under a single category with a 15.5% safe harbour margin reduces compliance burdens and litigation risk for UK firms using Indian service providers.
2. Expanded thresholds: The rise in the safe harbour turnover threshold from INR 300 crore to INR 2000 crore brings more mid-sized and large UK subsidiaries under the simplified framework.
3. Data centre focus: New safe harbour rules for cloud-linked data centre services provided a 15% margin, benefiting UK companies sourcing cloud services from India.
4. Faster dispute resolution: The introduction of faster, more automated Advance Pricing Agreement (APA) mechanisms offers greater long-term stability for cross-border transactions.
5. Lowered pre-payment: Pre-payment for tax disputes is reduced from 20% to 10% of the core tax demand, easing cash flow for contested issues.
Union budget 2026-27 represents a significant shift in India’s transfer pricing ecosystem. It marks a transition from a regime characterized by frequent scrutiny and litigation towards one focused on predictability, automation, and structured certainty.
For UK group companies with India subsidiaries or service arrangements, these reforms offer both opportunity and responsibility. On one hand, enhanced safe harbour margins and block assessments reduce audit exposure, compliance burden, and cash flow uncertainty. On the other hand, the strengthened documentation framework and automated scrutiny mechanisms require greater internal coordination, data transparency, and strategy transfer pricing planning. Uk multinationals groups/companies must therefore view transfer pricing not merely as a compliance structuring, and long-term cross border stability.
Post-budget 2026 framework creates a more predictable environment for UK-India commercial relations. However, Sustained compliance discipline and forward-looking tax planning will remain essential to fully realise its benefits.
