Tax professionals are urging the government to address a critical gap in India's taxation framework through Budget 2026, specifically regarding Employee Stock Ownership Plan (ESOP) taxation for employees with cross-border work experience. The current system creates significant uncertainty for expatriates and returning Indians who face disputes due to unclear guidelines on how stock option income should be apportioned across different countries.

Current ESOP taxation framework

Under India's existing tax structure, employee stock options are taxed at the time of exercise. The system calculates the taxable value as the difference between the fair market value of shares on the exercise date and the exercise price paid by the employee. This amount is treated as a perquisite and taxed under the salary head.

However, the framework fails to specify how this income should be treated when employees have earned options while working partially outside India, creating a significant regulatory gap.

Cross-border complications

Employee stock options typically vest over several years and are linked to continued employment, meaning the benefit often relates to services performed across multiple countries. Despite this reality, tax assessments frequently focus on where the employee is based at the time of exercise rather than where the actual work tied to the stock options was performed.

A Deloitte budget expectation report highlights that the absence of clear apportionment rules has resulted in inconsistent treatment by tax officers. In some cases, employees have faced demands on the full ESOP gain in India even when substantial portions of their service period were spent overseas.

Expert recommendations

Nupoor Maharaj, Advocate at Delhi High Court & Supreme Court of India, emphasizes that "clarity is crucial" and calls for a more predictable framework for ESOP taxation along with steps to reduce avoidable litigation. The issue has gained prominence as global assignments and remote work arrangements increase, with professionals often moving jurisdictions multiple times between grant and vesting periods.

Priyal Goel Jain, Partner and NRI Tax Expert at Dinesh Aarjav & Associates, notes that the lack of clarity exposes employees to overlapping tax claims and creates unnecessary stress for those returning to India after overseas assignments.

Proposed solutions

Tax experts believe Budget 2026 should address this issue without requiring major legislative changes. Deloitte has suggested that the Central Board of Direct Taxes issue administrative guidance that would:

• Establish a clear method to allocate ESOP income in cross-border situations
• Define documentation norms for employees
• Provide standardized approaches for determining India-attributable income
• Reduce disputes and bring certainty for globally mobile professionals

Impact on India's talent strategy

The current ambiguity affects both employees and employers, with companies facing challenges in determining appropriate tax withholding amounts due to the absence of specific guidance. Residential status adds another layer of complexity, as there is no standard approach to determine how much of an ESOP gain should be attributed to Indian services.

As India positions itself as a global talent hub, unresolved questions around ESOP taxation risk becoming a friction point, particularly when stock-based compensation has become central to executive pay and startup hiring strategies.

As India approaches Budget 2026-27, the trade policy landscape has fundamentally shifted. The focus is no longer on whether to pursue free trade agreements but whether India's domestic trade infrastructure can effectively deliver the market access these agreements promise. In an era of geopolitical fragmentation and supply-chain reconfiguration, FTA effectiveness depends more on how goods are processed at ports than on negotiated tariff schedules.

Customs Administration: Where Policy Meets Reality

The customs administration serves as the critical interface between FTA commitments and economic outcomes. This is where treaty obligations translate into domestic law and where commercial certainty is either strengthened or undermined. While FTAs create preferential tariff entitlements, customs law operationalizes them through complex statutory provisions, rules, notifications, and verification procedures.

Over time, this interface has become increasingly compliance-heavy, prioritizing risk containment over trade facilitation. Budget 2026-27 presents an opportunity to rebalance this approach while maintaining necessary safeguards.

Rules of Origin: The Compliance Challenge

Rules of origin (RoO) represent the core friction point in India's FTA implementation. While inherently technical to ensure only genuinely originating goods receive preferential treatment, India's post-2020 framework has transformed RoO into high-stakes compliance exercises.

For companies embedded in global value chains, such granular visibility requirements are neither commercially realistic nor contractually guaranteed. Many businesses now treat FTA benefits as contingent rather than assured, adjusting pricing models to absorb potential future duties.

MSME Impact and Utilization Constraints

Micro, Small, and Medium Enterprises face particularly acute challenges. Lacking negotiating leverage with foreign suppliers, MSMEs often find compliance risks prohibitive, leading them to avoid preferential routes entirely. This compliance burden directly impacts FTA utilization rates across India's existing agreements.

Budget 2026-27 could address these issues through:

• Clearer verification thresholds and parameters for regional value content
• Limiting inquiries to defined risk scenarios
• Restoring finality to origin determinations within reasonable timeframes
• Streamlined documentation requirements for smaller enterprises

Quality Control Orders: Additional Bottlenecks

Regulatory constraints extend beyond origin verification. Quality Control Orders (QCOs), designed to enforce product standards, often lack sufficient alignment with India's trade commitments or partner countries' compliance capacities. Mechanical implementation of QCOs without considering trade agreement obligations creates additional barriers to FTA effectiveness.

Strategic Trade-offs and Economic Impact

The cumulative effect of these practical constraints creates a widening gap between trade policy intentions and actual outcomes. India's recent FTAs with advanced economies aim to attract investment and integrate Indian firms into global value chains, yet such integration requires predictable border processes.

Excessively defensive customs administration may safeguard revenue short-term but discourages participation in complex supply chains that drive productivity gains. Conversely, a calibrated, risk-based approach preserves enforcement while enabling scale, specialization, and investment.

The Path Forward

Signing FTAs alone does not generate economic momentum. Real economic dividends materialize when companies reallocate capital, reconfigure supply chains, and upgrade production facilities to exploit new comparative advantages. This requires domestic adjustment capacity and the ability for labor, land, and capital to move toward sectors benefiting from openness.

India's uneven experience with past FTAs highlights these constraints. Low usage rates and imbalanced trade outcomes often reflect situations where companies find it costly and risky to adjust to new trade regimes, preferring the certainty of normal tariffs over compliance-heavy preferential routes.

For Budget 2026-27, the imperative is clear: if India wants FTAs to deliver genuine economic value, trade diplomacy must be supported by domestic reforms that simplify origin rules, improve border predictability, and enable firms to integrate into global value chains with confidence. The next phase of global trade competitiveness will be shaped less by agreement signatories and more by whose borders facilitate confident trade flows.