Marching towards the 3rd Largest Economy – India: Transfer Pricing Expectations from Budget 2026

India’s Global Trade Momentum

India’s trade and investment landscape is undergoing a structural shift, marked by the conclusion of major Free Trade Agreements with the UK, Oman, and New Zealand and advanced negotiations with the European Union – potentially the most consequential trade pact to date and being labelled as the ‘Mother of all deals”. As India deepens its integration into global value chains, building a predictable, efficient, non-adversarial and investor-friendly tax framework has become critical to sustaining this momentum.

Transfer pricing (TP) sits at the centre of this objective, shaping cross-border investment decisions, supply chain structures, and dispute outcomes. With foreign investors continuing to highlight regulatory complexity and litigation risk, the Union Budget presents a timely opportunity to introduce targeted TP reforms that enhance certainty, manage disputes, and reinforce India’s position as a preferred global business destination.

The Indian tax landscape will also see the new Direct Tax Code proposed to be implemented from April 1, 2026. It will replace the existing Income Tax Act, 1961 (the Act), with a simplified, modernized structure, reducing the number of sections and, consequently, legal disputes.

Outlined below are key transfer pricing expectations from the upcoming Budget.:

1. Growth Enabler: Safe Harbour Regime for Global Capability Centres (GCCs)

While safe harbour rules currently exist for IT, ITES and KPO services, India’s fast-growing destination as the preferred Global Capability Centre (GCC) option, the ecosystem spans a much broader range of functions, including finance, analytics, R&D support, and operational services. Introducing a separate definition and safe harbour margins for GCCs could provide much-needed certainty and further position India as a global GCC hub.

2. Ease of Doing Business: Year-End Compliance Relief for Foreign Entities

Section 115A of the Act grants non-residents relief from filing income tax returns where tax has been appropriately withheld on income such as royalties, interest, dividends, and fees for technical services. However, such relief is not mirrored under the TP regulations, resulting in continued requirements to file Form 3CEB, even where no return is required. Aligning TP provisions with return-filing exemptions by providing a waiver from filing Form 3CEB for such cases would reduce compliance burdens and avoid inadvertent non-compliance/ related penalties.

3. Compliance Rationalisation: Revisiting TP Documentation and Reporting Thresholds

Currently, Rule 10D prescribes TP documentation only where international transactions exceed INR 1 crore, but Form 3CEB filing remains mandatory irrespective of value. This inconsistency leads to uncertainty, especially for small taxpayers who may not maintain documentation despite certification requirements. Clarification and relief for small taxpayers, along with an upward revision of the INR 1 crore threshold, would enhance compliance efficiency and proportionality.

4. Secondary Adjustment: Time to rationalise

The secondary adjustment provisions have a de-minimis monetary limit of INR 1 crore to the primary adjustment. This threshold warrants a revision to allow taxpayers to atleast think about not litigating in some conditions. With the limit being low, there is no other option but litigation in case of TP adjustments.

Amnesty schemes are designed to resolve legacy disputes and reduce litigation. However, in transfer pricing cases, secondary adjustment provisions often act as a deterrent, particularly for large adjustments exceeding INR 1 crore. A one-time waiver of secondary adjustment for taxpayers opting into amnesty schemes could significantly improve participation and align outcomes with the core objective of dispute resolution.

Publication – Taxsutra

By Nitin Narang

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