Industry stakeholders and various chambers of commerce have called upon the government to place manufacturing-led growth and scaling up of Micro, Small, and Medium Enterprises (MSMEs) at the center of its economic strategy for Budget 2026-27. With domestic demand showing signs of revival, the focus has shifted toward comprehensive support measures that can enable MSMEs to expand capacity, integrate into global value chains, and generate employment at scale.

Industry Demands for MSME Support

The PHD Chamber of Commerce and Industry (PHDCCI) has emphasized the critical need to scale up MSMEs to facilitate their transition into global value chains. The chamber highlighted that high input costs, long maturation periods, and global competition continue to restrict domestic manufacturing capacity, necessitating renewed focus on capital support and tax rationalization.

Paresh Parekh, partner and National Leader for Tax at EY India, noted that enhanced MSME support, promotion of digital payments, and targeted fiscal relief through lower personal taxes could strengthen disposable incomes and consumer sentiment, directly stimulating retail demand.

Structural Tax Challenges

Inverted GST structures remain a significant concern for the manufacturing sector. These structures, where inputs and services are taxed at higher rates than finished goods, continue to result in substantial credit accumulation, particularly affecting sectors with heavy spending on advertising, services, and capital goods. The Federation of Indian Micro and Small & Medium Enterprises (FISME) has highlighted that tax issues continue to discourage entrepreneurship, formalization, and scaling up of MSMEs.

Government Support Measures

The government has recently implemented several initiatives to strengthen MSME exports and ease operational challenges. A ₹25,060-crore Export Promotion Mission was rolled out in December, designed to provide affordable trade finance, export credit support, and market diversification opportunities for MSME exporters facing steep tariffs of up to 50% from the US.

Under the mission's Niryat Protsahan component, the government launched an interest subvention scheme offering approximately 2.75% interest support on pre and post-shipment rupee export credit for MSME exporters, with additional incentives proposed for under-represented markets.

Authorities also withdrew multiple quality control orders (QCOs) covering key chemicals, petrochemicals, polymers, synthetic fibers, yarns, and other intermediate inputs used extensively in textiles, plastics, packaging, automotive components, and downstream manufacturing industries. This move aims to ease regulatory burdens on MSMEs and the broader manufacturing sector.

Persistent Challenges

Despite recent government initiatives, structural challenges continue to impact MSME growth. The Indian Small Business & Franchise Association (ISFA) has identified persistent issues including limited access to affordable credit, regulatory compliance hurdles, and high operating costs that hinder scalability and formalization.

FISME's budget submission emphasizes that while recent demand-boosting measures such as higher income-tax exemptions and GST simplification are expected to trigger a new growth cycle, the key challenge remains ensuring that increased demand is met by domestic production, particularly by MSMEs, to generate local employment and distribute economic gains more equitably.

Manufacturing-Focused Recommendations

PHDCCI has suggested comprehensive measures including rationalization of customs duties on critical raw materials, extension of concessional tax regimes for new manufacturing units, and stronger credit guarantee mechanisms and industrial infrastructure for MSMEs. The chamber emphasized that as manufacturing remains central to job creation, export growth, and supply chain resilience, Budget 2026-27 presents an opportunity to strengthen India's manufacturing capabilities by shifting from disjointed incentives toward a comprehensive framework that lowers risk, attracts private capital, and enables firms to scale efficiently.

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.