As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2026, tax experts are calling for a fundamental shift in approach—focusing on administrative efficiency rather than legislative overhauls. With the new Income Tax Act, 2025 scheduled to take effect from April 1, 2026, industry leaders believe this budget presents a unique opportunity to refine how India's tax system operates rather than what it legislates.

Dinesh Kanabar, Chairman & CEO of Dhruva Advisors India Pvt Ltd, describes Budget 2026 as arriving at a "very unique point in India's tax evolution," where the emphasis should clearly shift from drafting laws to ensuring efficient ground-level implementation. The extensive consultative process and parliamentary scrutiny that shaped the new Income Tax Act makes substantive changes counterproductive before the legislation even takes effect.

Limited Scope for Direct Tax Changes

The upcoming budget operates within the context of one of India's most comprehensive direct tax law overhauls in decades. This backdrop significantly constrains the room for major legislative modifications. Kanabar argues that India's current tax challenges stem not from legal architecture but from administration and implementation gaps.

Despite implementing faceless assessments, digitization, and reduced physical interfaces, tax disputes continue rising. This trend indicates that while systems have evolved, outcomes have not improved proportionally, highlighting the need for administrative rather than legislative solutions.

TDS Rationalization as Priority Reform

Tax deduction at source (TDS) emerges as the most urgent area requiring attention. While designed as a collection mechanism, TDS complexity has created significant compliance and litigation risks for businesses. The current system burdens companies with extensive time and resource investments just to ensure accurate withholding tax compliance.

Kanabar proposes rationalizing TDS into simplified categories that could dramatically reduce complexity without affecting government revenues:

• One rate for salary payments
• Uniform rate for most non-salary payments
• Higher rate for exceptional incomes

This streamlined approach would significantly reduce compliance complexity and litigation while maintaining revenue collection efficiency.

Strategic Tax Policy for High-Tech Manufacturing

The budget presents an opportunity to leverage tax policy for supporting India's advancement in high-technology manufacturing sectors, including semiconductors, artificial intelligence, and advanced electronics. These capital-intensive, R&D-driven sectors currently receive limited tax incentives compared to competing international jurisdictions.

Carefully designed R&D incentives with appropriate safeguards could attract crucial investments in sunrise sectors essential for long-term competitiveness. This approach gains additional relevance amid tightening global visa regimes, particularly affecting highly skilled Indian professionals in science and technology who may return due to constraints like H-1B visa limitations.

Addressing Tax Litigation Backlog

Tax litigation represents one of India's most persistent structural challenges. At current disposal rates, clearing the existing backlog could require five to six years, creating inefficiencies for all stakeholders.

India's previous dispute resolution schemes from 2020 delivered positive results, providing a foundation for expanded frameworks. Kanabar advocates for comprehensive dispute resolution covering both direct taxes and indirect taxes like customs, where litigation has accumulated over decades.

Administrative Mindset Transformation

Beyond compliance and litigation issues, fundamental administrative mindset changes remain essential. Persistent problems include mechanical assessment reopenings, indiscriminate notice issuance, and insufficient accountability measures that continue eroding taxpayer confidence.

While faceless systems reduced physical interactions, they created new challenges around responsiveness and thoughtful application. Taxpayers require certainty and fairness above all, with administration serving as facilitative rather than adversarial partners in nation-building.

The Real Budget Opportunity

Budget 2026 represents an opportunity to enhance system functionality rather than rewrite existing laws. The combination of easier compliance procedures, targeted incentives, effective dispute resolution, and humane administration can collectively restore confidence and reduce friction within India's tax ecosystem.

As India enters this new tax era with the upcoming Income Tax Act, 2025, the most significant reform potential lies in administrative improvements rather than legislative modifications. This approach acknowledges that successful tax systems depend not just on well-crafted laws but on their effective, fair, and efficient implementation.

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.