Union Finance Minister Nirmala Sitharaman conducted a comprehensive pre-Budget consultation meeting with States and Union Territories with legislatures in New Delhi, as part of the preparatory process for the Union Budget 2026-27. The high-level consultation brought together key state leadership and senior finance officials to discuss budgetary priorities and recommendations.

Key Participants and Attendance

The consultation meeting witnessed significant participation from state leadership across the country. Minister of State for Finance Pankaj Chaudhary joined the proceedings alongside Sitharaman.

Government Representation

The meeting included comprehensive representation from the Ministry of Finance, with Secretaries from three key departments participating in the consultation process:

• Department of Economic Affairs
• Department of Expenditure
• Department of Revenue

This multi-departmental approach ensures that various aspects of fiscal policy and budgetary considerations are adequately addressed during the consultation process.

Budget Timeline and Significance

The government has confirmed its commitment to presenting the Union Budget on February 1, maintaining the established timeline. The Union Budget for 2025 was presented on February 1, and the Budget for 2026 is scheduled for the same date.

The upcoming Budget presentation will mark a significant milestone for Sitharaman, as it will be her ninth consecutive Union Budget presentation, highlighting her sustained leadership in India's fiscal policy formulation.

Consultative Process Framework

These pre-Budget meetings represent a crucial component of the government's consultative approach to budget preparation. The sessions are designed to gather comprehensive views and suggestions from States and Union Territories, ensuring that regional perspectives and priorities are incorporated into the national budgetary framework. This collaborative approach strengthens the federal structure by providing states with a platform to contribute to national fiscal policy discussions.

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.