As Budget 2026 approaches, market expectations are gravitating toward capital market tax relief, but industry experts argue for a broader perspective beyond Long-term Capital Gains (LTCG) and Securities Transaction Tax (STT) discussions. With geopolitical tensions and global market uncertainties weighing on investor sentiment, the focus is shifting toward domestic growth levers that can provide sustainable economic support.

Privatization as Primary Priority

Ajay Srivastava of Dimensions Corporate Finance Services presents a clear agenda for the upcoming budget. His primary recommendation centers on privatizing Public Sector Undertakings (PSUs) as the most critical reform needed. Srivastava criticizes the current approach to government capital expenditure, arguing that excessive spending has failed to deliver proportionate economic returns despite heavy investment in infrastructure projects.

"Money is being spent, but not efficiently. Multiple layers of expenditure are not translating into real economic mileage," Srivastava explains, highlighting concerns about infrastructure quality despite substantial government spending.

Consumption and Private Investment Focus

Market expert Sunil Subramaniam takes a macro-oriented approach, suggesting that while markets might welcome LTCG or STT removal for short-term gains, these measures do not address fundamental growth drivers. He identifies two critical areas requiring attention: boosting private consumption and enhancing private capital expenditure.

Subramaniam emphasizes that government capital expenditure has remained consistent, and marginal increases are unlikely to meaningfully alter the growth trajectory. The real challenge lies in encouraging consumer spending, which has remained weak despite income support measures and tax relief in recent years. He believes a consumption revival would naturally stimulate higher private investment levels.

Policy Framework Recommendations

Several strategic initiatives could help achieve double-digit growth levels, according to expert recommendations:

• Expanding the Production Linked Incentive (PLI) framework
• Incentivizing public-private partnerships
• Offering targeted support for private capital expenditure
• Addressing persistently low inflation concerns

Subramaniam also raises concerns about low inflation levels, particularly affecting the rural economy. "We need a bit of reinflation to boost nominal GDP," he notes, cautioning that aggressive rate cuts may not support healthy earnings growth.

Foreign Investment and Domestic Capital Concerns

Srivastava expresses strong criticism regarding tax benefits extended to foreign investors, arguing that substantial concessions have been provided to international entities, including Middle Eastern sovereign funds, with limited long-term capital inflows. "Capital exits tax-free, while domestic companies remain starved," he states, highlighting the disparity in treatment between foreign and domestic investors.

The expert suggests that promoters seeking government support should face higher accountability standards, warning that overly comfortable conditions can suppress risk-taking behavior and fail to revive genuine entrepreneurial spirit.

Promoter Stake Sales Trend Analysis

A significant concern highlighted involves the trend of promoter stake sales, with data from Prime Database and Motilal Oswal revealing substantial divestment activity.

Srivastava interprets this trend as reflecting deeper confidence issues within the business community. "If promoters themselves are selling shares, it tells you they don't believe in their own businesses anymore," he argues. Rather than reinvesting capital into expansion or capacity building, promoters appear to be directing funds toward personal assets instead of productive capital expenditure.

Policy Recommendations and Market Outlook

To address these challenges, experts suggest implementing tougher policy measures:

• Tightening norms around promoter exits
• Encouraging institutional investors to be more selective
• Discouraging mutual funds from purchasing shares from promoters unwilling to invest in their own companies

Srivastava believes such measures would send strong signals about government expectations for corporate behavior and investment commitment.

While markets may respond positively to tax relief measures, the real test for Budget 2026 lies in its ability to revive consumption patterns, attract private investment, and improve public spending quality. The focus on fundamental growth drivers rather than traditional tax cuts represents a shift toward addressing structural economic challenges that could provide more sustainable long-term benefits for the Indian economy.

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.