Corporate India Awaits Budget 2026 with High Hopes for Tax Reforms
Expectations are soaring across corporate India as the Union Budget 2026 approaches. This year's budget holds extra importance because it comes just before the new Income-tax Act, 2025 takes effect on April 1, 2026.
While the ITA 2025 aims to simplify language and structure, it mostly keeps the core tax rules from the old 1961 law. This leaves some unclear areas and policy gaps unresolved. Companies now look to the upcoming budget for specific direct tax changes. They want more certainty, less legal disputes, and easier business operations.
Tax Neutrality for Fast-Track Demergers Needs Fixing
One urgent problem involves the tax treatment of fast-track demergers under Section 233 of the Companies Act, 2013. The old law created confusion about whether tax neutrality applied only to demergers approved by the National Company Law Tribunal under Sections 230–232, excluding fast-track ones.
Fast-track demergers help small companies and wholly owned subsidiaries restructure quickly without court involvement. They work like NCLT-approved schemes but use a different approval process. Denying tax benefits just because of this procedural difference seems unfair and goes against the goal of the fast-track route.
The government has said fast-track demergers are not tax neutral because courts do not monitor them, and valuations might lead to tax issues or avoidance. However, existing anti-avoidance rules could handle these concerns instead of a complete ban. With fast-track demergers getting broader scope in September 2025, the definition of "demerger" in Section 2(35) of ITA 2025 should include these schemes.
Clarifying the Definition of Associated Enterprises
Transfer pricing rules depend heavily on how we define Associated Enterprises. The ITA 2025 definition has two parts: participation in management, control, or capital, and specific transactional ties like loans or exclusive supply.
Right now, it is unclear if transactional relationships alone can create an AE link without the participation test. The current wording might allow overly broad interpretation. We need clear language stating that transactional ties by themselves, without capital, control, or management involvement, do not make an AE relationship.
Taxation of Buyback Proceeds Requires Balance
The Finance Act (No. 2) 2024 changed how share buybacks are taxed. Now, the entire buyback amount counts as dividend income for shareholders, regardless of accumulated profits, with no deductions allowed. The acquisition cost becomes a capital loss.
This move away from the old deemed dividend system, which taxed only up to accumulated profits, seems harsh. A fairer approach would tax buyback proceeds as dividends only to the extent of accumulated profits. The rest should count as sale consideration and face capital gains tax. Shareholders should also deduct related expenses, matching how we treat other dividend income.
Boosting Employment-Linked Deductions
Section 146 of ITA 2025 gives a 30% deduction on additional employee costs for three years. But it applies only to new employees earning up to INR 25,000 per month. This limit has not changed since 2016.
With wages rising due to inflation, this cap needs an increase. Updating it will keep the incentive relevant and effective for job creation.
Setting Clear Timelines for Income Tax Returns in Reorganisations
Current rules let taxpayers file modified returns after a business reorganisation only if the original return was filed before the reorganisation order. When the order comes close to the filing deadline, compliance becomes tough.
A standard six-month window from the order date in all cases would provide much-needed certainty and ease the process.
Rationalising TDS Provisions
TDS rules keep growing in scope and complexity, creating heavy compliance loads. Multiple rates, classification disputes, and reconciliation issues across Form 26AS/AIS, tax returns, GST filings, and financial statements often lead to mismatches and credit denials.
A clear plan to simplify TDS rates and compliance steps is crucial. It will cut litigation and improve the ease of doing business.
Other Key Expectations from the Budget
Businesses also seek clarity for foreign component makers who store goods in India for just-in-time supply without transferring ownership. A safe harbour proposed in Budget 2025 remains inactive and should start working.
Similarly, loan waivers under insolvency resolution via the IBC should not count as taxable income or attract TDS. This will help revived businesses start fresh.
As Budget 2026 draws near, these focused reforms can strongly support India's push for a stable and business-friendly tax system.
