Safe harbour margin set at 15.5% for IT services, threshold hiked

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Safe Harbour Margin Set at 15.5% for IT Services, Threshold Hiked

The Union Budget 2026, presented by Finance Minister Nirmala Sitharaman, has brought significant relief to the IT services sector. In a bid to simplify the tax compliance process and reduce disputes, the Finance Minister has proposed a common safe harbour margin of 15.5% for IT services. Additionally, the threshold for availing safe harbour for IT services has been enhanced from ₹300 crore to ₹2,000 crore. This move is expected to benefit a large number of IT services firms, allowing them to operate with greater ease and certainty.

The concept of safe harbour is not new to the Indian tax regime. It was introduced to provide certainty and avoid disputes in respect of transfer pricing. Safe harbour is a margin or range of margins within which the transfer price of a transaction is deemed to be at arm’s length, and therefore, not subject to adjustment by the tax authorities. The safe harbour margin is determined based on the type of transaction, industry, and other relevant factors.

In the past, the safe harbour margin for IT services was not clearly defined, leading to uncertainty and disputes. The lack of clarity resulted in a significant number of cases being litigated, with the tax authorities often challenging the transfer prices adopted by IT services firms. The proposed common safe harbour margin of 15.5% for IT services is expected to bring much-needed clarity and consistency to the tax regime.

The enhancement of the threshold for availing safe harbour from ₹300 crore to ₹2,000 crore is also a welcome move. This increase in threshold will allow more IT services firms to take advantage of the safe harbour provision, reducing the compliance burden and the risk of tax disputes. The increased threshold will also encourage more firms to opt for the safe harbour provision, which will lead to greater certainty and predictability in the tax regime.

Another significant aspect of the proposed safe harbour provision is that once applied by an IT services firm, the same safe harbour can be continued for 5 years at a stretch at its choice. This provision will provide stability and consistency to the tax regime, allowing IT services firms to plan their tax strategy with greater certainty. The 5-year period will also give firms sufficient time to adjust to any changes in the tax regime, reducing the risk of tax disputes and litigation.

The introduction of a common safe harbour margin for IT services is also expected to boost the growth of the IT sector. The IT sector is a significant contributor to India’s GDP, and the proposed safe harbour provision will provide a much-needed boost to the sector. The increased certainty and predictability in the tax regime will encourage more investment in the sector, leading to job creation and economic growth.

The proposed safe harbour provision is also in line with international best practices. Many countries, including the United States, the United Kingdom, and Australia, have safe harbour provisions in place to simplify the tax compliance process and reduce disputes. The introduction of a common safe harbour margin for IT services in India will bring the country’s tax regime more in line with international standards, making it more attractive to foreign investors.

In conclusion, the proposed safe harbour margin of 15.5% for IT services, along with the enhanced threshold and the 5-year continuation period, is a significant step forward in simplifying the tax compliance process and reducing disputes. The move is expected to benefit a large number of IT services firms, allowing them to operate with greater ease and certainty. The introduction of a common safe harbour margin for IT services is also in line with international best practices, making India’s tax regime more attractive to foreign investors.