Budget 2026 to Balance Revenue Goals with Global Tax Compliance as FDI Rises 19.4%
India's gross FDI rose 19.4% to $51.8 billion in April-September 2025-26, as Budget 2026 discussions focus on balancing revenue needs with global tax compliance. The government achieved a 155% increase in appeal disposals and signed a record 174 APAs in FY 2024-25, while 5.39 lakh appeals remain pending. Key expectations include codifying PE profit attribution rules, enhancing GIFT City provisions, and addressing Income-tax Act transition issues.
*this image is generated using AI for illustrative purposes only.
India's foreign investment landscape has reached a significant milestone, with gross FDI rising 19.4% to $51.8 billion in April-September 2025-26. This growth comes as discussions around Union Budget 2026 shift from traditional rate-reduction demands to more strategic concerns about revenue balance and tax certainty. The budget will serve as a crucial test of India's ability to harmonize domestic tax policies with evolving global standards while preserving its investment attractiveness.
Global Tax Standards and Cross-Border Investment Shifts
The international investment framework has undergone substantial changes, particularly affecting traditional FDI routes. Mauritius, which previously contributed nearly 34% of overall FDI to India, experienced a sharp decline in its share following the 2017 treaty amendments and introduction of General Anti-Avoidance Rules (GAAR). These developments reflect India's strategic pivot toward substance-based taxation, aligning with global treaty practices under the Multilateral Instrument (MLI).
The March 2024 Protocol introduced the Principal Purpose Test (PPT), adding further complexity to cross-border arrangements. However, the January 2025 CBDT Circular provided clarity by confirming that grandfathered pre-2017 investments remain outside the PPT's scope. To facilitate the transition from treaty-driven to substance-based investment, Budget 2026 is expected to codify profit attribution rules for Permanent Establishment (PE) and establish objective guidelines for Significant Economic Presence (SEP).
Corporate Law and Tax Code Alignment
The Ministry of Corporate Affairs recently expanded fast-track merger provisions under Section 233 of the Companies Act, 2013, effective September 2025. These provisions now enable unlisted firms and foreign holding companies to reorganize more efficiently. However, the Income-tax Act 2025 currently lacks corresponding provisions for tax neutrality in fast-track demergers, creating a gap that industry expects Budget 2026 to address.
| Reform Area: | Current Status | Expected Change |
|---|---|---|
| Fast-track Demergers: | No tax neutrality provisions | Tax neutrality alignment expected |
| Slump Sale Holding Period: | 36 months | Alignment to 24 months anticipated |
| Corporate Reorganization: | Limited tax support | Enhanced provisions expected |
GIFT City Development and Tax Incentives
Positioning GIFT City as a global financial hub requires addressing residual tax frictions, particularly taxation on dividends for non-residents investing through the International Financial Services Centre (IFSC). While Budget 2025 clarified the non-applicability of deemed dividend provisions for listed multinational enterprise (MNE) groups, this benefit remains unavailable to unlisted groups. Extending this clarity would enable unlisted MNEs to utilize IFSC for global cash pooling and treasury operations, enhancing GIFT City's competitiveness with Singapore and Dubai.
Administrative Progress and Dispute Resolution
The tax administration has demonstrated significant progress in dispute resolution during FY 2024-25. Key achievements include:
| Metric: | FY 2024-25 Performance |
|---|---|
| Appeal Disposals Increase: | 155% (1.72 lakh cases) |
| Pending Appeals: | 5.39 lakh cases |
| Advance Pricing Agreements: | 174 (record high) |
| Bilateral APAs: | 65 (highest ever) |
Despite the 155% increase in appeal disposals representing 1.72 lakh cases, 5.39 lakh appeals remain pending. This backlog continues to create working capital blockages and increase risk premiums for foreign investors, highlighting the need for enhanced appellate capacity.
The record 174 Advance Pricing Agreements (APAs) signed in FY 2024-25, including 65 bilateral APAs, demonstrates strong progress toward providing certainty and reducing cross-border transfer pricing disputes. Budget 2026 is anticipated to further strengthen the APA framework to enhance predictability for MNEs.
Tax Compliance Simplification
The current Tax Deducted at Source (TDS) regime features multiple rates ranging from 0.1% to 30%, creating classification disputes and cash-flow challenges. Industry expectations for Budget 2026 include:
- Consolidation of TDS rates into minimal brackets
- Exemption from TDS on B2B payments already subject to GST
- Streamlined compliance procedures to reduce administrative burden
The transition from the Income-tax Act 1961 to the Income-tax Act 2025 presents both opportunities and challenges. Critical transitional issues requiring clarification include carry-forward of losses, grandfathering of incentives, treatment of ongoing assessments, and reopening timelines. Budget 2026 must provide a comprehensive procedural framework to prevent these transitions from becoming sources of litigation and uncertainty.
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