Finance Bill 2026 Simplifies Tax Regime for IT and ITES Sector

The Finance Bill 2026 introduces a suite of proposals to cement India’s status as a global leader in the Information Technology (IT) and IT-Enabled Services (ITES) sector by simplifying critical tax regulations, strategically fostering investment in digital infrastructure, and significantly enhancing the ease of doing business. The direct tax proposals for the IT/ITES sector are aimed at providing the industry with the clarity and stability needed to innovate and expand. This analysis examines the specific direct tax reforms aimed at simplifying compliance for IT services and incentivizing investment in the broader technology landscape.

Streamlining the Tax Regime for IT and IT-Enabled Services

A cornerstone of the proposed reforms is the strategic simplification of the transfer pricing landscape for the IT and ITES sector. Recognizing the interconnected nature of modern technology services, these measures are designed to reduce ambiguity, minimize protracted litigation, and provide much-needed tax certainty for a diverse range of service lines. By creating a more predictable and streamlined compliance framework, the government aims to free up corporate resources for innovation and growth rather than tax disputes. The following reforms, detailed in the budget, represent a significant overhaul of the safe harbour regime for the technology sector in relation to Transfer Pricing Regulations:

• Unified Service Categorization:  The proposal introduces a single, unified category named “Information Technology Services”. This category will encompass a broad range of activities, including software development services, IT-enabled services, Knowledge process outsourcing (KPO) services, and contract R&D services related to software development. This consolidation directly tackles a common source of litigation, where tax authorities and taxpayers dispute the classification of services that are often commercially inseparable, such as software development with embedded KPO elements.
• Standardized Safe Harbour Margin:  A common safe harbour margin of 15.5% will be applicable to all services falling under the new “Information Technology Services” category. This standardization is a significant step towards eliminating transfer pricing arbitrage, where companies could previously characterize services to fit into a category with a more favorable margin. A single, clear rate enforces consistency across the industry.
• Enhanced Safe Harbour Threshold:  The eligibility threshold for availing the safe harbour provisions is proposed to be substantially increased from ₹300 crore to ₹2,000 crores. This expansion is a clear signal to large multinational corporations (MNEs) that India is serious about providing tax certainty at scale. By bringing players with revenues up to ₹2,000 crore into the simplified regime, the government is addressing a major segment of the market that was previously excluded and often embroiled in litigation.
• Automated Approval and Extended Validity:  A major procedural improvement is the shift to an automated, rule-driven approval process for safe harbour applications. This eliminates the need for discretionary examination by a tax officer, making the process faster and more objective. Furthermore, companies can opt to continue with the same safe harbour for a 5-year period at a stretch, a provision that greatly enhances stability and facilitates long-term business and financial planning.
• Fast-Track Advance Pricing Agreements (APAs):  For companies that prefer the certainty of an APA, the bill proposes to fast-track the Unilateral APA process specifically for IT services. The government will endeavor to conclude these agreements within a period of 2 years , with an option for a 6-month extension at the taxpayer’s request, thereby reducing the timeline and associated costs.
• Expanded Scope for Modified Returns:  The facility of filing modified returns, which is currently available only to the entity entering into an APA, is proposed to be extended to its associated entities as well. This is a highly practical amendment that recognizes the economic reality of MNE groups. It streamlines the resolution process by preventing a cascade of separate, time-consuming appeal proceedings for associated entities affected by a single APA. These targeted reforms for IT services create a more favorable operational environment, which is complemented by broader incentives designed to attract investment into India’s core technology infrastructure.

 Incentivizing Technology Infrastructure and Global Investment

The Finance Bill 2026 also outlines a clear strategy to attract global business and investment into India’s technology ecosystem. The tax holiday for global cloud providers acts as the primary ‘pull’ factor, while the corresponding safe harbour for domestic data centers provides the necessary tax certainty for the ‘push’ of building the required in-country infrastructure. Together, they form a seamless, tax-efficient value chain designed to attract end-to-end technology operations to India.

The key proposals to incentivize technology infrastructure and attract global capital and talent are as follows:

• Tax Holiday for Global Cloud Service Providers:  A significant tax holiday is proposed until FY 2047 for foreign companies that provide global cloud services by leveraging data center services from India. This long-term incentive is aimed at attracting major global cloud players to establish their infrastructure backbone in the country. A critical condition is that services provided to Indian customers must be routed through an Indian reseller entity, ensuring that domestic transactions are appropriately taxed.
• Safe Harbour for Indian Data Centres:  To complement the tax holiday for cloud providers, the bill introduces a corresponding safe harbour of 15% on cost for an Indian entity that provides data center services to a related foreign company eligible for the tax holiday. This ensures that the tax benefit for the global provider does not create a transfer pricing risk for its Indian related-party data center, de-risking the entire investment.
• Incentives for Electronics Manufacturing:
• To enhance just-in-time logistics, a safe harbour is proposed for non-residents warehousing electronic components in a bonded warehouse. This is set at a low profit margin of 2% of the invoice value , creating a highly competitive tax outcome compared to other jurisdictions.
• To promote toll manufacturing, a 5-year income tax exemption is proposed for non-residents who provide capital goods, equipment, or tooling to a toll manufacturer of electronic goods operating within a bonded zone. This directly encourages investment in India’s manufacturing capabilities.
• Attracting Global Talent:  To draw from the global talent pool, the bill proposes an income tax exemption on the global (non-India sourced) income of a non-resident expert. This exemption is applicable for a stay period of up to 5 years under notified government schemes, making it more attractive for world-class specialists to work in India for extended periods. These direct investment incentives are further supported by the government’s broader policy initiatives aimed at strengthening the entire technology and manufacturing value chain.

Broader Strategic Initiatives Supporting the Technology Ecosystem

The direct tax amendments in the Finance Bill 2026 are embedded within a larger framework of government policy aimed at systematically building domestic capacity, skills, and supply chain resilience in strategic and frontier technologies. While not tax-specific, these initiatives are critical for the long-term, sustainable growth and competitiveness of the IT/ITES sector and the broader digital economy. They signal a holistic approach to sector development, ensuring that the workforce and industrial base can support and capitalize on the opportunities created by the new tax incentives.

The following table summarizes key strategic initiatives from the budget speech that directly support the technology and electronics ecosystem:

These broader policies underscore the government’s commitment to creating a comprehensive and supportive environment for the technology sector’s continued advancement.

Conclusion: A Cohesive Strategy for IT/ITES Sector Advancement

The proposed amendments in the Finance Bill 2026 present a cohesive, multi-pronged strategy to accelerate the growth of India’s IT and ITES sector. The strategy effectively combines simplified and predictable tax regulations for core IT services with powerful, long-term incentives for investment in foundational digital infrastructure like data centers. This is further reinforced by measures to strengthen the domestic electronics manufacturing ecosystem and attract high-calibre global talent. By addressing critical pain points related to tax litigation and uncertainty while simultaneously creating compelling reasons for global capital to flow into the country, these measures are poised to significantly enhance India’s competitive edge. The reforms are expected to reduce tax-related disputes, provide greater certainty for business planning, and attract substantial global investment and talent, further solidifying India’s role as a preeminent global technology hub.