As the government focuses on ease of doing business and trust-based tax administration ahead of Union Budget 2026-27, tax experts are calling for a comprehensive review of India's transfer pricing compliance framework. The proposed reforms aim to ease the burden on small and medium enterprises while maintaining effective tax oversight.

Expert Recommendations for Reform

Gokul Chaudhri, President – Tax, Deloitte South Asia, has urged the government to rationalize reporting thresholds and introduce de minimis exemptions. "Indian transfer pricing compliance regulations have remained largely unchanged since their introduction in 2001. With India now the world's fourth-largest economy, the compliance thresholds need to be revisited to reflect economic reality," Chaudhri said.

The key reform proposals include:

Current Framework Challenges

India's transfer pricing regulations were originally designed to address inbound cross-border transactions following economic liberalization in 2001, when India ranked as the world's 13th-largest economy. The regulatory landscape has remained static despite significant economic transformation and the growing participation of Indian SMEs in international transactions.

The compliance burden has intensified as the number of active companies in India has grown from approximately 10.30 lakh in 2015 to over 17.30 lakh in 2024. This growth mirrors India's real GDP expansion over the same period, yet reporting thresholds remain unchanged with no de minimis threshold for the Accountant's Report and local file documentation requirements starting at ₹1.00 crore for international transactions.

Global Best Practices

Several developed economies have adopted more pragmatic compliance frameworks that balance efficiency with tax certainty:

"India can take a leaf out of these jurisdictions, which have balanced compliance efficiency with tax certainty," Chaudhri noted.

Reduced Arbitrage Risk Environment

Experts argue that the introduction of the Global Minimum Tax has significantly reduced cross-border tax arbitrage risks, making stringent compliance requirements less critical for smaller and low-risk entities. "In the current global tax environment, the scope for aggressive transfer pricing is far more limited. A calibrated relaxation will not accentuate TP risk," Chaudhri explained.

Potential Impact Assessment

According to statistical assessments, implementing these reforms could deliver substantial compliance relief:

• 25-30% reduction in India's overall transfer pricing compliance burden
• Nearly 50% of foreign associated enterprises could be relieved of reporting obligations
• Significant compliance cost savings for SMEs and overseas entities
• Maintained tax safeguards given that Indian-headquartered multinationals are generally considered low risk

The proposed changes would particularly benefit the SME sector while preserving the integrity of India's transfer pricing regime, as entrepreneurial decision-making and residual profits for Indian multinationals are largely located within India.

Tax policy experts have presented comprehensive recommendations for Budget 2026 to enhance India's mergers and acquisitions environment, particularly with the Income-tax Act, 2025 scheduled for implementation from April 1, 2026. The suggestions aim to address existing regulatory gaps and improve the ease of doing business for M&A transactions.

Fast-Track Demerger Tax Neutrality

A primary recommendation involves extending tax neutrality to fast-track demergers under Section 233 of the Companies Act, 2013. Currently, the Income-tax Act, 2025 provides tax neutrality only to NCLT-approved demergers under Sections 230 to 232, excluding fast-track demergers that enable small or closely held companies to undertake demergers without court approval.

The finance ministry's rationale for excluding fast-track demergers centers on concerns about potential valuation manipulation without court oversight. However, experts argue this approach contradicts the ease of doing business agenda, forcing genuine taxpayers to choose between transaction efficiency and tax benefits.

Contingent Consideration Clarity

Experts emphasize the need for clear taxation guidelines on earn-out, profit-linked, or contingent consideration arrangements that have become increasingly common in M&A transactions. These arrangements tie part of the sale consideration to achieving specific profitability or financial milestones.

The current legal framework lacks clarity on:

• Taxability of contingent payments
• Timing of taxation for such arrangements
• Treatment of milestone-based considerations

Foreign Company Merger Anomalies

The recommendations address existing inconsistencies in foreign company merger taxation. While foreign companies enjoy capital gains tax exemptions on direct or indirect share transfers during mergers with other foreign companies, shareholders of the amalgamating company face potential capital gains liability on share swaps.

This creates an anomaly compared to domestic mergers, which provide exemptions at both company and shareholder levels.

Capital Gains Tax Rate Concerns

The recent capital gains tax regime rationalization introduced higher long-term capital gains tax rates, which experts suggest adversely impacts investor returns and exit efficiency. The increased rates potentially drive investors toward jurisdictions with more favorable tax regimes.

Key concerns include:

• Reduced post-tax returns for investors
• Decreased competitiveness with other investment destinations
• Impact on foreign capital attraction

Experts recommend reducing capital gains tax rates, suggesting restoration of the earlier 10.00% rate to improve India's competitive position in attracting foreign investment.

Strategic Implementation Timeline

With the Income-tax Act, 2025 set for April 1, 2026 implementation, Budget 2026 represents the final opportunity to incorporate these amendments before the new framework takes effect. The recommendations aim to position India as a preferred destination for cross-border M&A activities while maintaining regulatory integrity and supporting corporate growth objectives.