In a move to solidify India’s standing as a global technology hub, the Union Budget 2026-27 has proposed an overhaul of the taxation framework for the Information Technology sector. Presenting the Budget on Sunday, Finance Minister Nirmala Sitharaman announced that the government would treat various technology segments as a singular “Information Technology Services” category to reduce classification disputes and streamline compliance.
Unified Classification and Safe Harbour
Under the proposal, software development services, IT-enabled services (ITeS), knowledge process outsourcing (KPO), and contract R&D related to software will be clubbed together. This unified category will be governed by a uniform safe harbour margin of 15.5%.
By removing the distinction between these interconnected segments, the government aims to eliminate long-standing transfer pricing disputes, where tax authorities and firms often disagreed on the classification of high-value services. The move is expected to provide fiscal predictability for Global Capability Centres (GCCs) and domestic exporters.
Scaling the Threshold
A cornerstone of this reform is the increase in the safe harbour eligibility threshold—raised from Rs 300 crore to Rs 2,000 crore. This expansion brings mid-sized and large IT firms under the simplified tax regime, a benefit previously restricted to smaller players. Furthermore, the approval process is slated to shift towards a rule-driven system, aimed at reducing manual examination by tax officers and lowering the compliance burden.
Strategic Context
The IT sector remains a vital engine of the Indian economy, with exports estimated at over $200 billion annually. The measures, alongside initiatives such as the India Semiconductor Mission (ISM) 2.0 and a proposed tax holiday extending up to 2047 for foreign cloud service providers using Indian data centres, are positioned to enhance global competitiveness. Combined with the proposed Education-to-Employment (E2E) standing committee for AI-driven skilling, the Budget signals an intent to move the sector steadily up the technology value chain.
