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.

As Union Budget 2026 approaches on February 1, bond markets are seeking reassurance rather than spectacle from fiscal policy. With global rate cycles remaining uneven and India's entry into global bond indices no longer providing immediate catalyst, the Budget has become the primary domestic anchor for yields, term premia, and investor confidence.

Over the past two years, the government has rebuilt trust with fixed-income markets through consistent and credible fiscal policy. Targets were not dramatic, but they were met, helping markets absorb large borrowing programmes without destabilising long-term rates even as global yields rose sharply.

Fiscal Deficit: The Critical Signal

Budget 2026 will test whether fiscal discipline has become embedded in policy framework. The most critical signal will be the fiscal deficit target for FY27. Markets are not demanding austerity or expecting sudden deficit reduction, but are looking for continuity and visible progress towards debt stabilisation.

Any indication that consolidation is being paused, diluted, or postponed will be reflected immediately in the yield curve. Bond investors have grown sensitive to the quality of consolidation, preferring revenue-led improvement, realistic subsidy assumptions, and transparent accounting over cosmetic adjustments and off-balance-sheet manoeuvres.

Borrowing Programme and Supply Management

Beyond the deficit, the borrowing programme will shape market behaviour throughout the year. The size of government borrowing is no longer the sole concern—delivery mechanism matters equally. With domestic institutions expected to absorb the bulk of issuance, predictability becomes a powerful stabiliser.

Effective supply management includes:

• Well-telegraphed auction calendar
• Thoughtful maturity distribution
• Active use of switches and buybacks
• Reduced volatility despite heavy supply

Poorly managed supply does not remain confined to government bonds but spills over into state development loans and high-quality corporate credit, widening spreads and tightening financial conditions unnecessarily.

Capital Expenditure and Execution Focus

Capital expenditure remains a central pillar of the Budget narrative. Public capex has justified higher borrowing by offering growth support without stoking near-term inflation. However, as allocations scale up, bond market focus is shifting from intent to impact.

Capex that translates into output supports growth and improves debt dynamics, while stalled capex simply adds to supply without corresponding benefits.

Financial Market Dynamics

Household financial flows present another influence on bond markets. Administered small savings rates, if misaligned with broader interest rate conditions, can distort deposit mobilisation and alter demand for government securities. Budget policies that respect these linkages help preserve financial stability.

With global index inclusion deferred, incremental improvements in market microstructure take on greater significance. Liquidity, transparency, and ease of participation for long-term investors may not grab headlines, but they reduce friction ultimately reflected in yields.

Market Confidence and Policy Continuity

Budget 2026 is unlikely to be remembered for dramatic announcements. Its importance lies in either reinforcing the trust carefully rebuilt between fiscal policy and bond markets, or testing it. For fixed income investors, this distinction matters enormously—when confidence holds, markets remain patient, but when it cracks, they are not.