India’s Government Moves to Simplify, Streamline Tax Compliance

India’s government has taken a significant step to enhance investor confidence by introducing simplified tax provisions and reducing tax compliance burdens.

The Finance Minister of India in her recent budget speech underlined tax reforms as key to realizing the Indian government’s vision of an “advanced India.” Proposed amendments to the existing Income Tax Act, 1961 by provisions of the Indian Finance Bill, 2025, would streamline transfer pricing assessments, expand the scope of safe harbor rules, and rationalize tax withholding provisions.

Potentially increasing the withholding threshold could offer relief and enhance cash flow for taxpayers. Expanding the scope of safe harbor provisions and introducing a multi-year arm’s-length price determination reflects the government’s commitment to reducing uncertainty and streamlining compliance.

While these proposals could create a more efficient tax environment, their real impact will be ascertained when the rules are published with complete guidelines, including time, form, and manner for implementing them.

Block Assessment

Transfer pricing provisions enable computation of income arising from international transactions or specific domestic transactions with regard to an arm’s-length price. Currently, a transfer pricing officer from the income tax authority determines arm’s-length price for each of the international transactions or specified domestic transactions on a year-on-year basis. Companies must repeat the same arm’s-length analysis every year, even when transactions are similar in nature.

To streamline the process and provide an alternative to annual arm’s-length price determinations, the government proposes that a transfer pricing officer carries out a multi-year determination in a three-year block, if the taxpayer wishes to exercise this option.

This means the arm’s-length price determined by the transfer pricing officer for an international transaction would apply to similar transactions for two additional consecutive years immediately following the initial year, effective from April 1, 2026.

Introducing multi-year arm’s-length price determination aligns India’s transfer pricing regulations with the OECD’s Base Erosion and Profit Shifting guidelines. It would foster global consistency and improve India’s standing as a tax-friendly jurisdiction.

While the form, manner, and time limit to exercise this option aren’t finalized yet, this measure aims to reduce the administrative burden of businesses engaged in similar intercompany transactions year after year.

Adopting multi-year arm’s-length determination wouldn’t waive other compliance requirements for taxpayers such as filing transfer pricing reports; benchmarking analysis; and functional, asset, and risk analysis. These serve as the foundation for transfer pricing assessments and must be fulfilled whether or not a taxpayer adopts a multi-year arm’s-length price determination.

Potential risks. While the multi-year determination may reduce the compliance burden of the taxpayer to an extent, it carries potential risks. If a company exercises this option and the transfer pricing officer adopts an aggressive position toward arm’s-length pricing in the first year, the company may face increased tax liabilities across all three years.

Taxpayers may hesitate to exercise the option because of the uncertainty around the outcome of first year arm’s-length price determination. Businesses will need to carefully evaluate the potential benefits and challenges once the detailed rules are published.

Safe Harbor Rules

The Finance Minister also proposes expanding the scope of existing safe harbor rules under India’s income tax laws.

Safe harbor rules provide certain circumstances in which the Indian income tax authorities accept the transfer price that the taxpayer has declared on related party transactions—reducing disputes and compliance costs.

The current safe harbor rules have generated little enthusiasm from taxpayers for various reasons, such as the limited international transactions in scope as well as the high margins and low thresholds for eligibility.

While the provisions for safe harbor rules are yet to be published, a measure to expand them could result in more certainty and a less litigious transfer pricing environment in India.

It will be interesting to see whether the existing safe harbor rates are also revised in addition to including more international transactions within the scope of safe harbor provisions.

Tax Withholding

The finance bill proposes rationalizing tax withholding provisions. These mandate withholding a certain percentage of the amount paid or amount payable by the payer to payee as taxes. Tax withholding only applies when a particular transaction exceeds a specified threshold of payment or income.

The bill calls for increasing the threshold amounts of payment and income beyond which tax must be deducted at the source, without any change in the withholding tax rate, for categories of payments and income such as interest on securities, dividends, and fees for professional or technical services.

The proposed amendment to rationalize withholding tax provisions would reduce the compliance burden for the taxpayer and promote ease of doing business.

Next Steps

The amendments will come into effect once the Finance Bill is passed by both houses of the Parliament and the bill receives the assent of the President of India. It’s possible that there will be further amendments to the proposed measures before the bill is passed.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aditya Singh Chandel is partner, Suhail Bansal is a senior associate, and Meghna Mittal is an associate with AZB & Partners in India.

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