India’s Component Warehousing Safe Harbor: A Competitive Tax Proposition for Global Manufacturers

In Budget 2026, the central government introduced a series of tax and customs reforms to strengthen India’s position as a global manufacturing and services hub. It placed particular emphasis on expanding safe harbor provisions, simplifying compliance requirements, and providing long-term certainty to global investors.

New safe harbor provisions are expected to be embedded within the new Income Tax Act, which will come into force from April 1, 2026.

The Budget 2026-27, announced on February 1, 2026, introduces a series of tax and customs reforms and places the expansion of safe harbor provisions, simplification of compliance obligations, and long-term certainty for global investors at the center of its reform agenda.

The central government has also introduced a safe harbor regime for component warehousing in bonded facilities, along with targeted exemptions for non-residents supplying manufacturing inputs.

Safe harbor expansion for non-residents and bonded operations

Five-year income tax exemption for capital asset suppliers

Non-residents supplying capital goods, equipment, or tooling to toll manufacturers operating in bonded zones will be eligible for a five-year income tax exemption.

This measure is designed to facilitate the seamless movement of production assets into India and to reduce tax friction for global manufacturers supporting Indian manufacturing operations.

Safe harbor for component warehousing in bonded warehouses

The Budget 2026-27 introduces a specific safe harbor regime for non-residents that engage in component warehousing within bonded facilities.

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Under this framework, eligible taxpayers must declare a minimum profit margin of 2 percent of invoice value, and tax authorities will refrain from initiating transfer pricing adjustments for covered activities when taxpayers comply with the prescribed margin.

At India’s prevailing corporate tax rate, a 2 percent margin results in an effective tax burden of approximately 0.7 percent of total turnover, thereby delivering a low and predictable tax outcome for qualifying warehousing operations.

This reform shifts the regime from a benchmarking-based transfer pricing approach to a formula-driven income attribution model.

Legislative framework and rule-based incorporation

Although announced in the Budget speech and incorporated in the Finance Bill proposals, the safe harbor becomes legally operative only after:

• Passage of the Finance Bill 2026-27 by the Indian Parliament and Presidential assent; and
• Notification of the corresponding Safe Harbor Rules by the Central Board of Direct Taxes (CBDT).

For transactions beginning April 1, 2026 (FY 2026-27), the provision is expected to be embedded within the Income Tax Act, 2025 and the Draft Income Tax Rules, 2026, which will govern the new tax regime. Transitional amendments under the Income Tax Act, 1961 may apply for the closing months of FY 2025-26, but from Assessment Year 2026-27 onward, the new Rules will form the operative framework.

Scope of the safe harbor under Rule 99 of the draft Income Tax Rules, 2026

Under the new income tax law, 2026, Rule 99 defines the structural parameters of the safe harbor regime applicable to bonded component warehousing.

Eligible assessee

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The regime applies to a foreign company that:

• Stores components in a warehouse located in a custom bonded area as defined under Section 65 of the Customs Act, 1962;
• Supplies those components to an Indian contract manufacturer; and
• Exercises the safe harbor option in accordance with Rule 100.

Eligible business activity

The eligible business consists of:

• Storage of components in a bonded warehouse; and
• Sale of those components to a contract manufacturer for use in manufacturing specified electronic goods.

The safe harbor therefore applies to a clearly defined supply-chain model integrating bonded warehousing and contract manufacturing.

Contract manufacturer

A contract manufacturer refers to an Indian company producing specified electronic goods on behalf of the foreign enterprise within a custom bonded area.

Gross receipts as the base

For this category, gross receipts represent the aggregate invoice value of components sold from the bonded warehouse to the contract manufacturer, including amounts paid, payable, received, or deemed to be received.

The prescribed 2 percent margin is applied to this gross receipt base, ensuring formula-based income attribution.

Specified electronic goods

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The regime covers components used in the manufacture of:

1. Mobile phones
2. Laptops, tablets, and all-in-one personal computers
3. Servers and ultra-small form factor devices
4. Sub-assemblies of the above products
5. Hearables, wearables, and related accessories

This sector-specific targeting aligns the safe harbor with India’s electronics manufacturing strategy.

Transfer pricing position before Budget 2026-27

Absence of a dedicated safe harbor

Under the earlier Safe Harbor Rules (Rule 10TD of the Income Tax Rules, 1962), prescribed margins existed for certain international transactions, including:

1. IT and ITES services
2. KPO services
3. Contract R&D services
4. Intra-group loans
5. Corporate guarantees
6. Manufacture and export of core and non-core auto components
7. Certain low value-adding intra-group services

However, component warehousing and bonded warehouse operations were not expressly covered.

Consequently, multinational enterprises engaged in cross-border warehousing transactions were required to determine arm’s length pricing under conventional transfer pricing methods such as the Transactional Net Margin Method (TNMM) or Comparable Uncontrolled Price (CUP) method. This exposed warehousing arrangements to routine audits and benchmarking disputes.

Previous transfer pricing treatment in India

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In practice, component warehousing was generally characterized as a routine logistics support or limited-risk distribution function. Arm’s length margins were determined through:

• Comparable logistics and distribution companies; and
• Detailed Functional, Asset, and Risk (FAR) analysis.

Tax authorities frequently scrutinized:

• Whether the Indian entity was appropriately classified as a low-risk service provider;
• Whether inventory and operational risks were correctly allocated; and
• Whether declared margins were understated.

Given that warehousing functions operate on structurally thin margins—typically between 2 and 3 percent—even minor adjustments could lead to:

• Disproportionately high tax additions;
• Increased litigation exposure; and
• Extended transfer pricing assessments.

Lack of formula-based certainty

Prior to the Budget 2026 proposal, no prescribed formula-driven margin guaranteed immunity from transfer pricing scrutiny for bonded warehousing functions.

Even commercially realistic margins remained vulnerable to:

• Comparability challenges;
• Functional recharacterization; and
• Mark-up disputes.

Accordingly, the regime lacked codified certainty for bonded warehousing activities.

Reduced transfer pricing risk and compliance certainty

Under the newly introduced safe harbor framework:

1. Companies declaring the prescribed 2 percent margin are insulated from detailed transfer pricing audits for the covered activity.
2. Income attribution becomes rule-based rather than negotiation-driven.
3. Litigation exposure and audit uncertainty are materially reduced.

Unlike incentive-based regimes in certain low-tax jurisdictions that depend on periodic eligibility reviews, substance testing, or policy renegotiation, a codified safe harbor offers structural predictability.

For multinational groups, certainty and administrability often outweigh marginal differences in statutory tax rates.

Why predictability matters for component warehousing

Component warehousing is:

• High in transaction volume;
• Operationally critical to manufacturing continuity; and
• Structurally low-margin, typically 2-3 percent.

In such functions, tax unpredictability can materially distort cost planning, inventory strategies, and supply chain efficiency.

A standardized 2 percent margin enables:

• Clear and replicable pricing models;
• Reduced need for defensive documentation;
• Faster internal approvals for capital deployment; and
• Lower long-term compliance costs.

In global supply chain management, predictability reduces total cost of ownership- not merely statutory tax expense.

Strategic implications for multinational manufacturers

The safe harbor framework sends a clear signal to multinational manufacturers evaluating regional warehousing hubs under “China +1” diversification strategies.

By offering:

1. Competitive post-tax outcomes;
2. Reduced regulatory friction;
3. Lower litigation risk; and
4. Integration with bonded manufacturing ecosystems.

India has strengthened its case as a viable location for regional component hubs, inventory staging operations, and supply consolidation centers.

Warehousing decisions frequently precede and influence downstream assembly and production footprint expansion. As such, tax certainty at the warehousing stage can have multiplier effects on broader manufacturing investment.

Alignment with India’s manufacturing strategy

The component warehousing safe harbor advances India’s broader objective of integrating more deeply into global value chains. By encouraging companies to warehouse components locally, the policy:

• Enhances supply chain resilience;
• Improves proximity between storage and assembly operations; and
• Strengthens ecosystem development around manufacturing clusters.

Instead of relying solely on headline tax holidays, India is using this policy to create structural predictability and deliver competitive effective taxation.

Conclusion

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The component warehousing safe harbor is not just about offering the lowest possible tax rate. It is about delivering clarity, certainty, and administrable compliance.

For multinational manufacturers operating on thin warehousing margins, a stable effective tax outcome of approximately 0.7 percent of turnover, combined with minimal dispute risk, may be more attractive than a nominally lower but uncertain regime elsewhere.

In the context of global supply chain realignment, India’s proposal positions tax policy as a strategic lever, reinforcing the country’s role not only as a production base but also as a reliable logistics and component hub within Asia.

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