India's direct tax landscape is set for a historic transformation with the introduction of the Income-tax Act, 2025. This new legislation marks a comprehensive overhaul, replacing the six-decade-old Income-tax Act of 1961. The core objective is to establish a simplified, principle-based framework designed to reduce litigation, improve tax certainty, and align the administration with a digital-first compliance environment, while preserving the foundational structure of the income tax system.
Key Direct Tax Reforms and Budget 2026 Imperatives
According to Sameer Gupta, National Tax Leader at EY India, the transition to the new law requires careful management. He emphasizes that detailed guidelines and FAQs are crucial to minimize confusion and avoid potential litigation. The forthcoming Budget 2026 is seen as a critical instrument to aid this transition and implement supportive reforms.
EY India has outlined several priority areas for direct tax reforms. Foremost among them is the need for certainty and predictability. Establishing a stable tax environment by minimizing frequent changes in tax rates is essential to build trust and improve compliance, which ultimately supports revenue collection.
Rationalizing TDS and Boosting Manufacturing
A significant pain point identified is the current TDS (Tax Deducted at Source) structure. With 37 different types of payments to residents and rates varying from 0.1% to 30%, these provisions are a fertile ground for disputes. They often lead to cash flow blockages for businesses awaiting refunds and avoidable interest costs for the government.
Experts recommend that Budget 2026 should lay down a roadmap for rationalization, proposing no more than three or four TDS rates. Furthermore, B2B payments already subject to GST could be exempted from TDS, as transaction data is already captured in Form 26AS or the Annual Information Statement (AIS).
To boost investment and stimulate growth, there is a strong call to incentivize manufacturing and employment. The government is urged to consider reintroducing accelerated depreciation as a targeted fiscal incentive for the manufacturing sector. This benefit should be integrated into the existing concessional corporate tax regimes of 22% or 15% to prevent triggering the Minimum Alternate Tax (MAT).
In line with the 'Make in India' initiative, this move could provide vital support to domestic manufacturers, enhance competitiveness, and attract investment. On the employment front, Gupta suggests increasing the monthly salary cap for the 'additional employee' benefit from Rs. 25,000 to Rs. 1 lakh. This change would make the incentive relevant for high-skill hires in emerging sectors like artificial intelligence and robotics, where salaries are typically higher.
Indirect Tax and Foreign Investor Certainty
On the indirect tax front, recommendations include simplifying the customs tariff framework to reduce the compliance burden on importers. This involves sector-wise duty rationalization and aligning rates with global standards to keep Indian goods competitive. Additionally, extending the validity of advance rulings for customs from three to five years would enhance tax certainty and mitigate disputes.
Gupta also highlights the critical need for tax certainty for foreign investors. The absence of specific rules regarding the existence of a Permanent Establishment (PE) and profit attribution has led to recurring litigation. Clear codification in these areas is essential. He further proposes considering an optional presumptive tax regime for foreign entities in specific sectors such as turnkey projects, technical and digital services, e-commerce, and general consultancy.
The successful implementation of the Income-tax Act, 2025, coupled with strategic reforms in the upcoming budget, is poised to unlock private capital, enhance India's global competitiveness, and support inclusive economic growth by creating a more transparent and predictable tax ecosystem.
