When Union Budget 2026 was presented, the central theme was clear, certainty in international taxation and transfer pricing. A month later, the release of draft rules provides sharper contours to that promise. What emerges is not just policy intent, but the mechanics of how that certainty will operate in practice.

The biggest headline reform was the rationalisation of the Safe Harbour regime for IT services. More than 80% of transactions concluded under the APA programme in 2024–25 related to IT-enabled services, back-office operations, and software development. Most of these were settled at cost-plus mark-ups of 15–16%. Against this backdrop, reducing the Safe Harbour rate to 15.5% and consolidating IT, BPO, KPO, and contract R&D services into a single category signalled alignment with commercial reality.

However, the draft rules introduce an important nuance. The 15.5% mark-up is confirmed only for the first three years beginning FY 2026–27, even though the Safe Harbour option can be elected for five years. This suggests that while medium-term certainty is provided, the government has retained flexibility to recalibrate rates thereafter. For businesses, this is certainty, but structured certainty.

Equally significant is the definition of who qualifies. The draft rules clarify that Safe Harbour applies only to an “eligible assessee” bearing insignificant risk. This requires evaluation of whether the Indian entity performs no strategic functions, owns no economically significant intangibles, undertakes only a limited functional role, and assumes limited risk. In effect, the Safe Harbour is positioned squarely for low-risk captive models. For many GCCs structured as support centres without entrepreneurial functions, this will provide clarity. For others with expanding mandates, functional alignment will now require careful review.

These developments also reshape the relevance of the APA programme. Historically, when Safe Harbour rates were 17–18%, many APAs concluded at 15–16%. Now that Safe Harbour is 15.5% with a five-year election, companies may reconsider whether pursuing an APA adds incremental value if they fall within the defined low-risk profile. At the same time, an intriguing question arises: if Safe Harbour is 15.5%, should APA outcomes begin to converge closer to 14%? In several benchmarking studies, the lower end of the arm’s length range typically lies around 12–13%, making 14% commercially defensible. The interplay between Safe Harbour and APA outcomes will likely define the next phase of pricing negotiations.

The draft rules also introduce materially expanded annual disclosure requirements under Form 48. Taxpayers will now need to disclose aggregation rationale, the Most Appropriate Method selected, comparables and margins applied, the Profit Level Indicator and base amounts, as well as quantified economic adjustments such as working capital, risk, capacity utilisation, and geographic differences. Separate disclosures are required for business restructuring. Capital financing transactions like borrowing, lending, guarantees and royalties require detailed information including benchmarking related information. 

In substance, while Safe Harbour simplifies pricing, compliance documentation is becoming more granular. This signals a clear regulatory approach: reduced disputes on margins, but enhanced transparency on methodology and facts.

On procedural matters, the draft clarifications reaffirm the Budget’s intent to resolve disputes around assessment timelines under the DRP framework and the computation of time available to the Transfer Pricing Officer. These changes are likely to close a significant number of pending cases rooted in procedural interpretation rather than pricing substance. At the same time, the retrospective nature of these clarifications subtly underscores the evolving relationship between judicial interpretation and legislative refinement, a dynamic inherent in any mature tax system.

Beyond transfer pricing mechanics, the data centre exemption announced in the Budget takes on added commercial significance when viewed against industry trends. India’s data centre capacity stands at roughly 950 MW and is projected to reach nearly 2 GW by 2026. Despite generating close to 20% of global data, India holds only about 3% of global data centre capacity. With expected capital expenditure of ₹50,000 crore over the next three years and industry revenue growth exceeding 25% annually, the sector is at an inflection point. Long-term tax certainty until 2047 for foreign companies procuring services from specified Indian data centres reduces characterisation and withholding tax concerns, potentially accelerating capacity build-out and global participation.

Taken together, the Budget proposals and draft rules reflect a calibrated approach. Certainty has been strengthened, but with defined eligibility thresholds, structured timelines, and enhanced disclosures. For investors and GCC operators, the message is clear: India is aligning tax policy with commercial realities, but expects transparency and functional discipline in return.

(Aditya Hans is partner and Ashish Jain is associate partner, Dhruva Advisors India Pvt. Ltd. Views are personal.)