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.

Rajiv Memani, President of the Confederation of Indian Industry (CII), has set realistic expectations for the upcoming Budget, suggesting that major tax concessions are unlikely as the government has already delivered significantly on the taxation front in recent years. Speaking from the World Economic Forum in Davos, Memani outlined key priorities that should guide the Budget scheduled for February 1st.

Budget Priorities: Manufacturing Over Tax Relief

Memani emphasized that expectations of substantial tax benefits should be tempered, stating that the government has done enough from a tax standpoint. Instead, he advocated for the Budget to focus on accelerating the pace of reforms and encouraging manufacturing value addition in India.

Import Substitution Strategy

A significant opportunity lies in import substitution, according to Memani. He highlighted that India's top 50 imports account for ₹500-550 billion, presenting a substantial opportunity for domestic manufacturing.

Memani suggested that coordinated efforts between central government, state governments, and respective ministries could develop strategies involving technology partnerships, incentives, and changes in buying patterns to achieve these substitution goals.

Disinvestment Programme

The CII President advocated for a bold disinvestment approach, recommending the government target ₹75,000 to ₹1,00,000 crores in disinvestment proceeds. This capital would be crucial for preserving capital expenditure and potentially creating a sovereign wealth fund for health and education sectors, making India more competitive.

India-EU Trade Deal Opportunities

Memani expressed optimism about the proposed India-EU trade deal, expected to conclude by January 27th. He described the agreement as opening access to the entire EU market, which is actively seeking to de-risk supply chains.

Key benefits of the India-EU trade deal include:

• Access to a large European market
• Opportunities for Indian exporters to diversify
• Reduction in tariff barriers, particularly for labour-intensive industries
• Platform for enhanced government and business cooperation
• Leverage for accelerated growth

Healthcare Sector Perspectives

Suneeta Reddy, Managing Director of Apollo Hospitals, echoed the need for policy continuity in healthcare reforms. She emphasized that reforms should focus on simplification and growth enablement rather than headline tax changes. Reddy highlighted the importance of investment in preventive healthcare, noting that the burden of non-communicable diseases could cost ₹4 trillion.

Global Economic Context

Regarding President Trump's recent statements at Davos, Memani noted positive market reactions to the de-escalation of tariff threats. He suggested that market stabilization would have positive impacts on India, including potential benefits for the rupee. The focus on forging new trade relationships with like-minded countries presents opportunities for India to strengthen relationships globally.

Source: https://www.cnbctv18.com/economy/wef-davos-2026-no-big-tax-giveaways-expected-manufacturing-reforms-key-in-budget-rajiv-memani-19826408.htm