What are Safe harbour reforms?
Safe harbour reforms refers to the major amendments done to the transfer pricing rules defined in Section 92CB.
In transactions between related entities of the same multinational group, entities must prove to the IT department, that transactions with related parties are set at prices that are at “arm’s length.” This method of setting prices at arm's length is called transfer pricing.
But in practice, this area often leads to disputes with tax authorities. This is exactly where safe harbour rules comes into play.
Safe harbour rules provided pre‑defined margin for companies falling with certain threshold. If a company’s declared margin falls within this range, the tax authorities automatically accept it- no litigation, no questioning whatsoever.
Key Amendments Announced
- Consolidation of Service categories:
- Increased Threshold Limit:
Previously, there were Separate margins for IT services, ITeS, KPO, and contract R&D (varying from 17% to 24%). This amendment merges them all into one 'IT services' category and the prescribed margin for that category is fixed at 15.5% of operating expenses.
The Safe harbour turnover threshold for the consolidated "Information Technology Services" category has been increased to ₹2,000 crore from from the previous threshold of ₹300 crore (that was applicable for FY 2024-25/2025-26).