India's transition to the new tax regime is gaining momentum, with filing data showing significant adoption among taxpayers. As the country prepares to implement the Income Tax Act 2025 from April 1, 2026, Budget 2026 presents a crucial opportunity to establish the foundations for a simplified, responsive tax ecosystem.

Current Tax Regime Adoption Shows Strong Progress

The shift towards India's new tax regime is well underway, supported by compelling filing statistics. The data reveals substantial taxpayer adoption and expanding compliance base.

This adoption rate demonstrates that Budget 2025's approach of nudging taxpayers towards the new regime through rationalized rates and fewer deductions has been effective.

Three Strategic Priorities for Budget 2026

Budget 2026 should concentrate on three key priorities to support the successful rollout of the Income Tax Act 2025. These focus areas address the operational challenges of implementing a simplified tax framework while maintaining compliance effectiveness.

Improving Ease of Compliance

The first priority involves providing greater clarity and addressing inequities where needed. This includes simplifying complex compliance requirements and ensuring transparent guidelines for taxpayers navigating the new framework.

Strengthening Digital Infrastructure

The second focus area encompasses enhancing technological capabilities through:

• Pre-filled returns for simplified filing processes
• Intuitive dashboards for better taxpayer experience
• AI-enabled assistance to reduce errors and simplify filing procedures

These digital enhancements aim to reduce compliance burden while improving accuracy and efficiency.

Streamlining Dispute Resolution

The third priority addresses the need for faster, more predictable dispute resolution through faceless processes and time-bound mechanisms. This approach aligns with the "trust first, scrutinize later" philosophy while ensuring timely resolution of taxpayer concerns.

Key Areas Requiring Attention

Several specific areas need consideration to enhance the new tax framework's effectiveness. These include addressing long-standing concerns around cryptocurrency taxation, employee stock options, and refund processing delays.

The current approach to virtual digital assets involves a flat 30% tax rate with limited deduction allowances, contrasting with capital gains frameworks used in jurisdictions like the US and UK. Greater clarity in this area could help retain trading activity within India's tax jurisdiction.

Employee stock options present another challenge, with tax payable at allotment rather than realization. While eligible startups receive deferred taxation benefits, extending similar relief to other employees merits consideration for broader equity.

Building a People-Centric Tax Ecosystem

The success of the Income Tax Act 2025 will depend on creating a tax ecosystem characterized by predictable rules, timely refunds, clear guidance, and efficient appeals processes. Faster refund processing through technology, coupled with real-time tracking dashboards, would strengthen taxpayer trust in the system.

Dispute resolution remains a critical area needing attention, with numerous cases pending at appellate levels. Taxpayer-friendly reforms, including prioritization frameworks and wider use of faceless hearings, can support faster and more predictable resolution processes.

Budget 2026 represents an opportunity to establish India's tax system as simple, responsive, and people-centric, focusing on operational excellence rather than rate adjustments to ensure the new law's successful 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.