NewsStocksBudget 2026: Tax administration reforms take priority over new legislation, say expertsBudget 2026: Tax administration reforms take priority over new legislation, say experts
Tax experts recommend that Union Budget 2026 prioritize administrative reforms over legislative changes, given the new Income Tax Act, 2025 takes effect April 1, 2026. Key focus areas include TDS rationalization into simplified rate categories, strategic R&D tax incentives for high-tech manufacturing, and comprehensive dispute resolution frameworks to address the five-to-six-year litigation backlog at current disposal rates.
*this image is generated using AI for illustrative purposes only.
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.
| Current Challenge: | Impact |
|---|---|
| Multiple TDS rates across sections | Classification disputes and litigation |
| Complex rate structures | High compliance costs for businesses |
| Revenue-neutral disputes | Unnecessary administrative burden |
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.
| Litigation Impact: | Consequences |
|---|---|
| Revenue delays | Government deprived of dues beyond 20% pre-deposit |
| Business uncertainty | Contingent liabilities affecting cash flows |
| Decision-making constraints | Long-term business planning difficulties |
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.
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