The Center has proposed to end long-standing tax uncertainty for Indian units of foreign technology services firms and Global Capability Centers (GCCs) by setting a uniform profit margin for taxing their IT services in the country.
The Union Budget 2026-27 has proposed a minimum profit of 15.5% for foreign technology unitsIn the Union Budget for 2026-27 presented on Sunday, Finance Minister Nirmala Sitharaman said a flat tax would be applicable on IT services firms earning a minimum profit margin of 15.5%, replacing different categories that attract different tax treatment and often trigger disputes.
The change aims to ensure companies operating back-end and technology operations in the country and encourage more investment.
“India is a global leader in software development services, IT enabled services, knowledge process outsourcing services and software development contract R&D services. These business segments are highly interconnected with each other. All these services are proposed to be clubbed under a single segment of information technology services with a common safe harbor margin of 15.5%,” Bodhara applies as part of Part 2060 Part 2020. speech
The minister said the safe harbor limit for IT services is also being significantly increased from Rs 300 crore to Rs 2,000 crore.
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In the past, there has been ambiguity regarding GCC taxation in the country. They were tagged into three broad buckets based on the work they did for the parent firm. These include IT enablement services, knowledge process outsourcing services and contract R&D services related to software development. Tech centers operating in each of these broad buckets attract different tax rates based on their profits.
“Over time, the definition of software-enabled work, R&D service work and outsourcing has changed. In the past, these would have been controversial and attracted long drawn-out tax-related scrutiny. This Budget makes the tax processes clearer for companies looking to set up GCC in India,” said Ritika Lagane Gupta, Partner and Tax Leader, GCC India.
How the new rules work
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Consider a US-based pizza chain that opens a GCC in Bangalore to handle IT-related functions such as billing, supply chain management and employee payroll. Suppose, the cost of managing those IT functions from its Bangalore center ₹100, while GCC charges its parent company ₹Revenue 120. Under the new framework, GCC will be taxed on a deemed profit ₹15.5, even if it reports a higher profit. Similarly, if GCC reports ₹110 of Revenue, it may tax a presumptive profit ₹15.5, albeit with a premium.
At least two experts said the change is expected to boost GCC investment in the country.
“Extended ₹2,000 crore threshold, automatic rule-based approval, five-year continuation of safe harbor and accelerated unilateral APA timelines significantly reduce audit exposure, compliance complications and risk of disputes, thereby improving long-term spend certainty and supporting scale-up of high-value centerup global capabilities in India.
Advance pricing agreements, or APAs, essentially mean that GCCs that do not earn cut-off profits can request the tax authorities in advance not to charge them additional taxes for a specified number of years.
“Safe harbor for IT services will be granted through an automated rule-driven process without the need for the tax officer to examine and accept the application. Once applied for by an IT services company, the same safe harbor can continue for 5 years extending as per its choice,” said Sitharaman.
The finance minister added that firms not sure of safe harbor profit margin reporting can now seek an APA at the earliest
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“For IT services companies who want to do Advance Pricing Agreement (APA), I propose to fast-track the unilateral APA process for IT services and try to complete it within 2 years. The 2-year period can be extended by another 6 months on the taxpayer’s request,” said Sitharaman.
Gupta welcomed the move, as it provided more clarity than the past approach.
A second expert echoed the same sentiment, adding that companies can now avoid costly lawsuits.
“This move was made to create certainty for global companies looking at expanding operations in the country. Tax related issues will always be a hurdle for those companies as they will attract litigation but now there is clarity with the introduction of a simplified tax regime,” said Homi P. Ranina, Supreme Court of India Advocate and Tax Law Expert.
However, a third expert said that some jobs not classified under IT-related jobs are deprived of government benefits.
The safe harbor margin “will further encourage the transfer of higher value-added technology functions to the GCC in India, as they are likely to be within safe harbor limits. Creating an integrated IT/ITeS bucket helps address the pain points of clearly categorizing various GCC activities within the current safe harbor category, which may still undercut some high-value ESG activities outside the IT/ITeS category, for which treatment remains to be seen,” said Meiyappan Nagappan, partner in Trilegal’s tax practice
This development comes at a time when large companies are opening technology centers in India due to the large pool of skilled talent. They can either set up shop with a boutique firm or partner with a large IT service provider.
According to IT industry body Nasscom, India currently hosts more than 1,760 Global Capability Centers (GCCs), with Bangalore and Hyderabad hosting 875 and 355 respectively. The GCC generates at least $64.6 billion in export earnings, and Nasscom estimates that number will rise to 2,200 by March 2030, with a market value of $105 billion.
