New Income Tax Act 2025: Transfer Pricing & Intl Tax Changes

For Indian businesses engaged in cross-border transactions and multinational enterprises operating in India, understanding the international taxation landscape has become increasingly complex. When Rajesh, CFO of a mid-sized IT services company with clients across the US and Europe, received notices about revised transfer pricing documentation requirements under the New Income Tax Act 2025, he realized the regulatory framework had fundamentally transformed. The Central Board of Direct Taxes (CBDT) recently conducted comprehensive technical webinars throughout August 2026 to clarify these sweeping changes in international tax and transfer pricing provisions that every taxpayer with foreign transactions must understand.

Overview of International Tax Reforms in the New Income Tax Act 2025

The New Income Tax Act 2025, which replaces the Income Tax Act of 1961, represents the most comprehensive overhaul of India's tax legislation in over six decades. During the CBDT's technical webinar series held in August 2026, senior tax officials emphasized that international taxation and transfer pricing provisions have been consolidated, modernized, and aligned with global standards including the OECD's Base Erosion and Profit Shifting (BEPS) framework.

The Act reorganizes international tax provisions into distinct chapters addressing Permanent Establishment (PE) criteria, transfer pricing methodologies, treaty benefit eligibility, and digital economy taxation. This structural reorganization moves away from the scattered section-based approach of the 1961 Act to a more logical, chapter-based framework that improves clarity for taxpayers and tax professionals alike.

One of the most significant changes highlighted in the CBDT webinars is the codification of Significant Economic Presence (SEP) as a basis for establishing business connection in India. Non-resident enterprises conducting systematic digital business activities or engaging with Indian users can now be subject to taxation even without physical presence, addressing the tax challenges of the digital economy.

Transfer Pricing Documentation and Compliance Changes

The revised Chapter X of the New Income Tax Act 2025 fundamentally transforms transfer pricing compliance requirements. According to CBDT officials during the August 2026 webinars, the three-tiered documentation structure introduced under BEPS Action Plan 13 has been fully integrated into Indian law.

Master File, Local File, and Country-by-Country Reporting

Multinational enterprises must now maintain comprehensive documentation across three levels. The Master File provides an overview of the group's global business operations, intangible assets, financing arrangements, and financial positions. The Local File contains detailed analysis of material international transactions undertaken by the Indian entity, including functional analysis, economic analysis, and selection of the most appropriate transfer pricing method.

Country-by-Country Reporting (CbCR) applies to Indian constituent entities of multinational groups with consolidated revenues exceeding ₹750 crore. The CbCR must be filed within 12 months of the accounting year-end and includes jurisdiction-wise breakdown of revenue, profit before tax, income tax paid and accrued, stated capital, accumulated earnings, number of employees, and tangible assets.

The threshold for maintaining transfer pricing documentation has been clarified: entities with aggregate international transactions exceeding ₹50 crore for tangible goods or ₹10 crore for services and intangibles during the financial year must maintain detailed Local File documentation. This represents a continuation of existing thresholds but with enhanced disclosure requirements particularly for digital services and intangible property transactions.

Enhanced Focus on Intangibles and Digital Transactions

CBDT webinar presenters emphasized that the 2025 Act introduces specific provisions addressing intangible property transfers and digital business models. Transfer pricing studies must now include detailed analysis of Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) functions related to intangibles, ensuring that profits are allocated to jurisdictions where substantial value-creating activities occur rather than where legal ownership resides.

For taxpayers engaged in cross-border transactions, using the Income Tax Calculator can help estimate tax liability after applying arm's length adjustments to international transaction pricing.

Safe Harbour Rules and Advance Pricing Agreements

One of the most taxpayer-friendly aspects highlighted in the CBDT webinars relates to the expanded safe harbour regime and streamlined Advance Pricing Agreement (APA) procedures under the New Income Tax Act 2025.

Revised Safe Harbour Thresholds

The safe harbour regime provides certainty by accepting declared transfer prices for specified categories of international transactions if they meet prescribed margins and conditions. Under the 2025 Act, safe harbour provisions have been expanded to cover more transaction types and revised margin requirements.

Transaction Type	Operating Margin Requirement	Annual Transaction Limit
Software Development Services	18% on operating costs	Up to ₹200 crore
Knowledge Process Outsourcing (KPO)	22% on operating costs	Up to ₹200 crore
Contract R&D Services (routine)	24% on operating costs	Up to ₹200 crore
Intra-group Loans (borrowing)	Interest not exceeding base rate + 150-300 bps	Based on credit rating
Corporate Guarantees	0.5-2% of guarantee amount	Subject to conditions

For example, if a Bangalore-based IT services company providing software development services to its US parent company reports an operating margin of 20% on operating costs of ₹45 crore (resulting in operating profit of ₹9 crore) and total transaction value of ₹150 crore, it would qualify for safe harbour protection, eliminating the need for detailed benchmarking studies and reducing transfer pricing audit risks.

Streamlined APA Framework

The Advance Pricing Agreement mechanism has been strengthened under the 2025 Act with reduced processing timelines and expanded scope. CBDT officials announced during the webinars that target timelines for APA processing have been reduced to 18-24 months, compared to the previous 36-48 month average.

APAs can now cover up to 9 years: 4 rollback years plus 5 prospective years. Both unilateral APAs (between the taxpayer and Indian tax authorities) and bilateral APAs (involving competent authorities of treaty partner countries) remain available. The 2025 Act encourages bilateral APAs particularly for complex transactions involving intangibles and digital services to ensure consistency and eliminate double taxation risks.

The application fee structure remains ₹10 lakh for unilateral APAs and ₹20 lakh for bilateral/multilateral APAs. Given the compliance certainty and litigation cost savings, APAs are particularly valuable for enterprises with recurring international transactions exceeding ₹100 crore annually.

BEPS Implementation and Anti-Avoidance Measures

The New Income Tax Act 2025 fully incorporates India's commitments under the OECD's Base Erosion and Profit Shifting (BEPS) project, as extensively discussed in the CBDT August 2026 webinar series.

General Anti-Avoidance Rules (GAAR) Strengthening

GAAR provisions have been refined and strengthened in the 2025 Act to target arrangements lacking commercial substance and designed primarily to obtain tax benefits. The Principal Purpose Test (PPT) incorporated from the Multilateral Instrument (MLI) now applies to treaty benefit claims, requiring taxpayers to demonstrate that obtaining tax benefits was not one of the principal purposes of the arrangement.

CBDT officials clarified that GAAR provisions apply to arrangements entered into on or after April 1, 2017, and the 2025 Act continues this framework with enhanced procedural safeguards including mandatory Approving Panel review before GAAR invocation.

Limitation of Benefits and Treaty Shopping Prevention

The Act incorporates specific Limitation of Benefits (LOB) provisions aligned with MLI modifications to India's tax treaties. Taxpayers claiming treaty benefits must satisfy beneficial ownership criteria, demonstrate substantial business activities in the treaty jurisdiction, and meet prescribed tests including ownership, base erosion, and derivative benefits tests.

For instance, a Netherlands-based holding company seeking treaty benefits on dividend income from its Indian subsidiary must demonstrate that it is the beneficial owner of the shares, conducts substantial business operations in the Netherlands beyond mere holding of investments, and is not a conduit arrangement designed primarily for treaty shopping.

Significant Economic Presence and Digital Economy Taxation

One of the most progressive aspects of the New Income Tax Act 2025 is the codification of Significant Economic Presence (SEP) as a basis for taxation of non-resident digital businesses, a topic that received substantial attention during the CBDT webinars.

SEP Criteria for Business Connection

Under the 2025 Act, a non-resident enterprise is deemed to have business connection in India if it carries on systematic and continuous soliciting of business activities in India or engages in interaction with prescribed number of Indian users through digital means. Specific thresholds have been established:

• Annual revenue from India-based customers or users exceeding ₹2 crore from specified digital transactions
• Systematic engagement with 300,000 or more Indian users during the financial year

This provision targets major global digital platforms providing online advertising, provision of digital platform services, sale of data collected from Indian users, and software-as-a-service offerings. The nexus rules ensure that non-resident digital enterprises creating significant value from Indian markets contribute appropriate tax revenue.

Equalisation Levy Continuation

While SEP provisions expand the scope of business connection taxation, the Equalisation Levy framework continues under the 2025 Act. The 2% Equalisation Levy on e-commerce supply or services facilitated through digital platforms applies to non-resident e-commerce operators with annual consideration exceeding ₹2 crore from India-based customers.

Businesses managing multiple revenue streams and tax obligations can utilize the Form 26AS / TDS Fetch Tool to track all tax credits and deductions claimed, ensuring accurate compliance reporting.

Permanent Establishment and Tax Treaty Provisions

The New Income Tax Act 2025 modernizes Permanent Establishment (PE) definitions and tax treaty interaction provisions based on OECD model conventions and MLI modifications.

Expanded PE Definitions

The Act recognizes multiple PE categories including fixed place PE, agency PE, service PE, and installation/construction PE. Importantly, anti-fragmentation rules prevent artificial splitting of contracts to avoid PE thresholds. For example, if a foreign construction company undertakes multiple contracts in India through related entities, the combined duration is considered for the 12-month service PE threshold rather than treating each contract separately.

Agency PE provisions have been strengthened to capture situations where a dependent agent habitually concludes contracts or habitually plays a principal role leading to conclusion of contracts that are routinely concluded without material modification by the non-resident enterprise.

Tax Residency and Treaty Relief Procedures

The 2025 Act clarifies tax residency determination criteria and procedures for claiming treaty benefits. Individual residents are determined based on residential status rules (182 days or more in India), while corporate residency is based on Place of Effective Management (POEM) criteria for foreign companies controlled from India.

To claim treaty benefits, taxpayers must obtain a Tax Residency Certificate (TRC) from the tax authorities of the treaty jurisdiction and file Form 10F providing prescribed details including tax identification number, residency period, and nature of income. Lower withholding tax rates or exemptions under treaties apply only after satisfying these procedural requirements and beneficial ownership criteria.

Consider a UK-based consultant providing advisory services to an Indian company and invoicing ₹25,00,000 annually. Under the India-UK tax treaty, if the consultant does not have a fixed base PE in India and stays less than 183 days, the income may be taxable only in the UK. However, to claim this exemption, the consultant must provide a valid TRC, Form 10F, and satisfy beneficial ownership requirements.

Compliance Deadlines and Reporting Requirements for FY 2026-27

CBDT officials provided detailed guidance during the August 2026 webinars on critical compliance timelines under the New Income Tax Act 2025 for the current assessment year 2026-27 (financial year 2025-26).

Transfer Pricing Documentation Timelines

Taxpayers must maintain contemporaneous transfer pricing documentation (Master File and Local File) at the time of filing the income tax return. While the documentation itself is not filed with the return, it must be furnished to the Assessing Officer within 30 days of request during transfer pricing proceedings.

The Form 3CEB (Accountant's Report on international transactions) must be obtained from a Chartered Accountant and filed electronically by October 31, 2026, for taxpayers with international transactions exceeding prescribed thresholds during FY 2025-26. This represents a one-month extension from the previous September 30 deadline under the old Act.

Country-by-Country Reporting Deadlines

For multinational groups with accounting year ending March 31, 2026, the Country-by-Country Report must be filed by March 31, 2027 (within 12 months of accounting year-end). Parent entities or designated alternate reporting entities must file the CbCR, while Indian constituent entities must file notification regarding the reporting entity details.

Planning your tax compliance across multiple jurisdictions and transaction types requires comprehensive tracking. The Bank Statement Analyser can help identify all cross-border transactions and ensure complete disclosure in transfer pricing documentation.

APA Application Timelines

Applications for Advance Pricing Agreements can be filed at any time but preferably before undertaking significant international transactions. For rollback provisions (applying APA terms to prior years), applications must be filed before the end of the assessment year in which the first rollback year falls. Given the 18-24 month processing timeline, taxpayers contemplating APAs should initiate applications well in advance of transaction commencement.

Practical Implications for Indian Taxpayers

The international tax and transfer pricing changes under the New Income Tax Act 2025 create both compliance obligations and planning opportunities for various taxpayer categories.

Impact on IT and ITeS Companies

India's large IT services sector, which derives substantial revenue from cross-border service delivery, faces enhanced documentation requirements but also benefits from expanded safe harbour provisions. Companies should evaluate whether their operating margins qualify for safe harbour protection, potentially eliminating expensive annual benchmarking studies.

For example, a Chennai-based software development company with ₹180 crore in export revenue to its Singapore parent and operating margins of 19% on costs can opt for safe harbour protection, saving approximately ₹15-20 lakh annually in transfer pricing study costs while gaining audit protection.

Pharmaceutical and Manufacturing Enterprises

Companies engaged in contract manufacturing or research services with related parties overseas must carefully document the DEMPE functions related to intangibles. If an Indian pharmaceutical company conducts significant R&D but transfers intellectual property rights to a foreign affiliate for nominal consideration, transfer pricing authorities will scrutinize whether arm's length compensation was received for the value-creating DEMPE functions performed in India.

E-commerce and Digital Businesses

Foreign e-commerce platforms, digital advertising companies, and SaaS providers must evaluate their Significant Economic Presence in India. Those exceeding the ₹2 crore revenue threshold or 300,000 user threshold are required to register, file returns, and pay tax on India-sourced income, fundamentally changing their Indian tax exposure from nil to potentially substantial tax liability.

Multinational Holding Structures

Groups using intermediate holding companies in treaty jurisdictions (Netherlands, Singapore, Mauritius) must ensure these entities satisfy beneficial ownership criteria and LOB provisions. Shell companies without substantial business operations may be denied treaty benefits on dividends, interest, and royalty payments, resulting in higher withholding taxes.

Frequently Asked Questions

What are the major transfer pricing changes in the New Income Tax Act 2025?

The New Income Tax Act 2025 restructures transfer pricing provisions under revised Chapter X, introducing simplified documentation requirements, expanded safe harbour thresholds for low-value transactions, and streamlined Advance Pricing Agreement (APA) procedures. The Act mandates Country-by-Country Reporting (CbCR) for multinational enterprises with consolidated revenues exceeding ₹750 crore, aligning with OECD's BEPS Action Plan 13. Transfer pricing study requirements now include enhanced disclosure of intangible transactions and digital business models.

How does the New Income Tax Act 2025 address international taxation?

The Act consolidates international tax provisions into dedicated chapters covering Permanent Establishment (PE) rules, tax treaty benefits, Equalisation Levy on digital transactions, and anti-avoidance measures. It introduces Significant Economic Presence (SEP) criteria for non-residents conducting digital business in India, strengthens General Anti-Avoidance Rules (GAAR) provisions, and implements Multilateral Instrument (MLI) treaty modifications. The Act also clarifies Tax Residency Certificate requirements and beneficial ownership criteria for treaty claims.

What is the safe harbour regime under the New Income Tax Act 2025?

The safe harbour regime provides certainty to taxpayers by accepting declared transfer prices for specified international transactions without detailed scrutiny. Under the 2025 Act, safe harbour thresholds have been revised upward for eligible transactions including software development services, knowledge process outsourcing, and intra-group loans. Taxpayers meeting prescribed margins (typically 18-24% for services depending on risk profile) and transaction value limits can opt for safe harbour protection, reducing transfer pricing litigation and providing compliance predictability.

Are Advance Pricing Agreements (APAs) available under the New Income Tax Act 2025?

Yes, the New Income Tax Act 2025 strengthens the APA framework by reducing processing timelines to 18-24 months and expanding eligibility to cover more transaction types including digital services and intangible property transfers. Both unilateral and bilateral APAs remain available, with the Act encouraging bilateral agreements through competent authority procedures. APAs can cover up to 9 years (4 rollback years plus 5 prospective years), providing long-term transfer pricing certainty and reducing compliance costs for multinational enterprises.

What are Country-by-Country Reporting requirements in the New Income Tax Act 2025?

Under the New Income Tax Act 2025, Indian constituent entities of multinational groups with consolidated revenue exceeding ₹750 crore must file Country-by-Country Reports (CbCR) within 12 months of the accounting year-end. The report must detail revenue, profits, taxes paid, and economic activities across all jurisdictions where the group operates. Master File and Local File documentation requirements apply to entities with international transactions exceeding specified thresholds, typically ₹50 crore for goods and ₹10 crore for services annually.

Conclusion: Navigating the New International Tax Landscape

The New Income Tax Act 2025 represents a fundamental transformation of India's international taxation and transfer pricing framework, bringing enhanced compliance obligations alongside greater certainty through safe harbour and APA mechanisms. As highlighted in CBDT's comprehensive August 2026 webinar series, taxpayers engaged in cross-border transactions must proactively assess their documentation requirements, evaluate safe harbour eligibility, and consider APA applications for significant recurring transactions. The alignment with OECD BEPS standards and MLI treaty modifications positions India's tax system within the global mainstream while protecting the domestic tax base from erosion.

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