Union Budget 2026 - International Taxation & Transfer Pricing - Key Highlights
Union Budget 2026 marks a strategic shift in India’s international taxation and transfer pricing framework, with a strong emphasis on attracting foreign investment, promoting high-growth sectors such as data centers and electronics manufacturing, strengthening tax certainty, and modernizing safe harbour and APA mechanisms.
1. Tax Exemption for Foreign Companies in Data Center & Cloud Services
Section 9, Section 10 — New Exemption Notification Framework
Budget 2026 Proposal
Foreign companies procuring data center services from specified Indian data centers will be granted a tax exemption on such income.
Key Conditions
- The specified data center must be:
- Set up under a notified scheme by MeitY
- Owned and operated by an Indian company
- All sales to Indian customers must be routed through an Indian reseller
Effective Period
- Applicable from 1 April 2026 (AY 2026-27)
- Valid until 31 March 2047
In simple terms, MIS turns your accounting data into actionable business intelligence.
2. Tax Exemption for Foreign Suppliers in Electronics Manufacturing
Section 9, Section 10, Section 195
Budget 2026 Proposal
Tax exemption will be provided to foreign companies supplying capital goods, tools, or equipment to Indian contract manufacturers operating in custom-bonded areas.
Scope
- Applies to electronics manufacturing
- Supports Make in India & contract manufacturing ecosystems
Validity
- Effective from 1 April 2026
- Available until FY 2030-31
3. Major Overhaul of Safe Harbour Rules for IT Services
While the format of MIS can differ by industry, an effective report generally covers these 5 key areas:
Section 92CB — Safe Harbour Rules
Unified Safe Harbour Regime for IT Sector
Budget 2026 introduces a transformational restructuring of Safe Harbour Rules by:
Key Changes
- Merging the following categories into one unified IT services category:
- Software development services
- IT-enabled services
- KPO services
- Contract R&D related to software
- Introducing a single Safe Harbour margin of 15.5%
- Increasing eligibility threshold from INR 300 crore to INR 2,000 crore
- Implementing automated approval without officer discretion
- Allowing a 5-year continuous block option
Impact
- Reduces transfer pricing litigation
- Provides pricing certainty
- Enhances ease of compliance for captive IT service providers
4. Safe Harbour for Indian Captive Data Center Service Providers
Section 92CB — Safe Harbour Rules
New Proposal
A Safe Harbour margin of 15% on cost is introduced for Indian captive data center service providers.
Impact
- Encourages foreign cloud companies to set up captive centers in India
- Simplifies benchmarking and documentation requirements
- Improves India’s attractiveness as a data infrastructure base
5. Safe Harbour for Component Warehousing in Electronics Sector
Section 92CB — Safe Harbour Rules
Proposal
A Safe Harbour margin of 2% on invoice value for non-resident companies engaged in component warehousing in bonded warehouses.
Estimated Tax Incidence
- Approx. 0.7% effective tax cost
Impact
- Supports just-in-time manufacturing
- Strengthens global supply chain efficiency
- Reduces tax friction in cross-border logistics
6. Fast-Tracking Unilateral Advance Pricing Agreements (APA)
Section 92CC — APA Framework
Budget 2026 Initiative
The Government proposes to fast-track unilateral APAs for IT services, with:
- Completion target of 2 years
- Optional 6-month extension upon request
7. Modified Return Facility for Non-Resident AEs under APA
Section 92CC, Section 139 — Modified Return Mechanism
Key Amendment
Non-resident Associated Enterprises (AEs) will now be allowed to:
- File modified returns
- Claim downward transfer pricing adjustments
- Seek refunds for excess tax withheld
Timeline
- Modified return to be filed within 3 months of APA conclusion
Limitation
- Available only under APA, not under MAP (Mutual Agreement Procedure)
8. Clarification on Transfer Pricing Officer (TPO) Time Limits
Section 92CA — TPO Order Timeline
Issue Addressed
Confusion existed regarding calculation of the 60-day limit for passing a TP order.
Budget 2026 Clarification
The manner of computing the 60-day deadline has been clarified based on assessment limitation dates.
Under Income-tax Act, 1961
| Scenario | Timeline to pass TPO order |
|---|---|
| Where assessment limitation expires on 31 March (non-leap year) | 30 January of that year |
| Where assessment limitation expires on 31 March (leap year) | 31 January of that year |
| Where assessment limitation expires on 31 December | 1 November of that year |
Under Income-tax Act, 2025
| Scenario | Timeline to pass TPO order |
|---|---|
| Where assessment limitation expires on 31 March | 31 January of that year |
| Where assessment limitation expires on 31 December | 31 October of that year |
Retrospective Effect
- Applicable from 1 June 2007
9. Removal of Penalty for Transfer Pricing Audit Report Default
Section 271AA, Section 271BA — Penalty Rationalization
Change
Penalty of ₹1,00,000 for failure to submit Transfer Pricing Audit Report (Form 3CEB) will be:
- Removed
- Replaced with a fee mechanism
Effective From
- FY 2026-27
| Scenario | Revised fee |
|---|---|
| Delay of up to one month | ₹50,000 |
| Delay beyond one month | ₹100,000 |
Overall Strategic Impact of Budget 2026 on International Tax & TP
Budget 2026 reflects India’s intent to:
- Strengthen its role as a global technology and manufacturing hub
- Provide certainty and stability to multinational enterprises
- Reduce transfer pricing disputes and litigation
- Promote investment-friendly tax policies
- Align domestic law with OECD BEPS and global best practices