BENGALURU: The Centre has proposed ending a long-standing tax uncertainty for Indian units of overseas tech services firms and global capability centres (GCCs) by setting a uniform profit margin for taxing their IT services in the country.
In the Union Budget for 2026-27 presented on Sunday, finance minister Nirmala Sitharaman said a fixed tax will apply to IT services companies getting a minimum profit margin of 15.5%, replacing the various categories that attracted different tax treatment and often triggered disputes.
The change is aimed at providing certainty to companies running back-end and technology operations in the country and encouraging further investment.
“India is a global leader in software development services, IT enabled services, knowledge process outsourcing services and contract R&D services relating to software development. These business segments are quite inter-connected with each other. All these services are proposed to be clubbed under a single category of Information Technology Services with a common safe harbour margin of 15.5% applicable to all,” said Sitharaman, as part of her Budget 2026 speech.
The minister said the threshold for availing safe harbour for IT services is also being enhanced substantially from 300 crore rupees to 2,000 crore rupees.
In the past, there was ambiguity on taxing GCCs in the country. They were tagged in three broad buckets based on the work they did for the parent firm. These included IT enabled services, knowledge process outsourcing services and contract R&D services relating to software development. Tech centres operating in each of these broad buckets attracted a different tax rate based on a profit they made.
“Over time, the definition of software enabled work, R&D services work and outsourcing as such has shifted. In the past, these would be contentious and would attract long-drawn tax-related scrutiny. This budget makes it clear for companies looking to set-up GCC in India by making tax processes clearer,” said Ritika Loganey Gupta, partner and GCC tax leader at EY India.
How the new rule works
Consider a US-based pizza chain that opens a GCC in Bengaluru to handle IT-related work such as billing, supply chain management and employee payrolls. Suppose the cost of managing those IT tasks from its Bengaluru centre is ₹100, while the GCC charges its parent company ₹120 in revenue. Under the new framework, the GCC will be taxed on an assumed profit of ₹15.5, even if it reports a higher profit. Similarly, if the GCC reports ₹110 in revenue, it can pay tax on an assumed profit of ₹15.5, although with a premium.
At least two experts said the change is expected to increase GCC investments into the country.
“The enhanced ₹2,000 crore threshold, automated rule-based approvals, five-year continuity of safe harbour, and expedited unilateral APA timelines significantly reduce audit exposure, compliance complexity, and dispute risk, thereby improving long-term cost certainty and supporting the scale-up of high-value global capability centre operations in India,” said Gupta.
Advance pricing agreements, or APAs, essentially mean that GCCs that do not earn up to the cut-off profit can ask tax authorities in advance not to charge them with extra taxes for a stated number of years.
“Safe harbour for IT services shall be approved by an automated rule-driven process without any need for tax officer to examine and accept the application. Once applied by an IT Services company, the same safe harbour can be continued for a period of 5 years at a stretch at its choice,” said Sitharaman.
The finance minister added that companies not sure of reporting the safe harbour profit margin could now seek an APA in quicker time
“For IT services companies who want to conclude advance pricing agreement (APA), I propose to fast track unilateral APA process for IT services and endeavour to conclude it within a period of 2 years. The period of 2 years can be extended by a further period of 6 months on taxpayer’s request,” said Sitharaman.
Gupta welcomed the move, as it provides greater clarity than past procedures.
A second expert voiced a similar opinion, adding that companies can now avoid expensive litigation.
“This move was done to create certainties for global firms looking at expanding operations into the country. Tax-related issues would always serve as a hindrance to those companies because they would attract litigation but now there is clarity as a simplified tax regime is introduced,” said Homi P. Ranina, advocate at the Supreme Court of India, and a specialist in tax laws.
However, a third expert said certain work not classified under IT-related work misses out on government benefits.
The safe harbour margin “is likely to further incentivise the shifting of higher value-added tech functions to GCCs in India, as they may likely be within the safe harbour range. While creating an integrated IT/ITeS bucket helps resolve pain points in clearly categorising various GCC activities within the current safe harbour categories, there may still be certain high value strategic and ESG activities which fall outside the IT/ITeS category, the treatment for which remains to be seen,” said Meyyappan Nagappan, partner of tax practice at Trilegal.
This development comes at a time when large companies have been opening tech centres in India due to an abundant pool of skilled talent. They can either partner with a boutique firm to set-up shop or with a large IT services provider.
According to IT industry body Nasscom, India currently hosts over 1,760 global capability centres (GCCs), with Bengaluru and Hyderabad hosting 875 and 355 centres. GCCs generate at least $64.6 billion in export revenue, and Nasscom estimates the number will rise to 2,200 by March 2030, with the market valued at $105 billion.
