Tax experts are urging the government to establish clear perquisite taxation rules for electric and hybrid vehicles in the upcoming Budget 2026, as employers increasingly struggle with uncertainty over how to tax EV benefits provided to employees.

Current Tax Framework Creates EV Uncertainty

For decades, employer-provided petrol and diesel cars have followed established tax guidelines with fixed monthly perquisite values based on engine capacity and limited variables. However, electric vehicles break this simplicity as they lack engine capacity for calculation anchoring, have varying charging costs between employees, and involve complex battery-related expenses that don't fit existing perquisite rules.

According to Deloitte, this absence of specific guidance has become a significant issue for employers who must deduct tax correctly but lack clear benchmarks, exposing them to risks from both inadequate and excessive deductions.

Impact on Corporate EV Adoption

The regulatory ambiguity is actively deterring employers from including electric and hybrid vehicles in standard corporate car policies, slowing EV adoption within organizations despite government incentives available under the Faster Adoption and Manufacturing of Electric Vehicles (FAME) and allied schemes.

Puneet Gupta, Director at S&P Global, explained: "In ICE vehicles valuation are clearly defined, whereas in Electric vehicles, it is a grey area. This is because there are a lot of unknowns, resulting in difficulty in calculating the valuation. The government can jump and provide EV-specific rules, and this will reduce compliance risk, ease tax withholding decisions for employers, and avoid interpretational disputes later."

While the issue hasn't reached critical levels due to limited EV penetration in corporate fleets, increasing company adoption driven by sustainability targets and employee demand is making inconsistent tax practices more problematic.

Expert Recommendations for Budget 2026

Tax professionals are calling for the Central Board of Direct Taxes (CBDT) to notify clear regulations specifically addressing electric vehicle perquisite taxation. According to Divya Baweja, Partner at Deloitte, such clarity would help employers accurately value EV perquisites while enabling employees to understand their tax liability clearly.

Key Policy Recommendations:

• Charging Expenses: Explicit allowance for reimbursement of public charging costs and home electricity consumption
• Battery Costs: Clear framework for factoring battery usage and replacement expenses
• Hybrid Vehicles: Distinct guidelines separating fuel-driven and electric components
• Framework Continuity: Focused changes rather than complete overhaul of existing car perquisite structure

Alignment with Government EV Push

Experts emphasize that the expectation for Budget 2026 is not additional incentives but regulatory clarity that aligns perquisite taxation with the government's established electric mobility initiatives. The proposed changes would close existing gaps appearing on corporate balance sheets while maintaining consistency in the current tax structure and reducing potential disputes over EV benefit valuation.

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.