Union Budget 2026: What corporate India wants from direct tax reforms

By Shaily Gupta and Aanchal Jain As the Union Budget 2026 approaches, expectations are moving precocious crossed firm India. This year’s fund assumes added value arsenic it precedes the implementation of the caller Income-tax Act, 2025 (ITA 2025), effectual 1 April 2026.

While the ITA 2025 has chiefly focused connected textual and structural simplification, it has mostly preserved the substantive taxation model of the erstwhile Income-tax Act, 1961 (ITA 1961). As a result, definite ambiguities, interpretational challenges and argumentation gaps stay unaddressed. Corporates truthful look to the upcoming Budget for targeted nonstop taxation reforms that tin heighten certainty, trim litigation and enactment easiness of doing business. Tax neutrality for fast- way demergersOne of the astir pressing issues relates to the taxation attraction of fast-track demergers nether Section 233 of the Companies Act, 2013. Under the erstwhile law, ambiguity existed connected whether taxation neutrality for demergers was constricted to schemes sanctioned by the National Company Law Tribunal (NCLT) nether Sections 230–232, thereby excluding fast-track demergers. These schemes were introduced to simplify and expedite restructuring for tiny companies and wholly owned subsidiaries by eliminating judicial intervention.

Fast-track demergers are akin to NCLT-approved schemes, the lone favoritism is the support mechanism. Denying taxation neutrality simply due to the fact that of procedural differences creates an artificial distinction, defeating the nonsubjective of the fast-track route. Although the Select Committee connected ITA 2025 acknowledged manufacture representations, the authorities clarified that fast-track demergers were not intended to beryllium taxation neutral arsenic they are not court-monitored, and truthful the valuations tin effect successful taxation implications oregon avoidance.

However, these concerns tin beryllium efficaciously addressed done existing anti-avoidance measures, alternatively than a broad denial. With the scope of fast-track demergers expanded successful September 2025, it is imperative that the explanation of “demerger” nether Section 2(35) of the ITA 2025 beryllium amended to see fast-track schemes.Clarifying the explanation of Associated Enterprises (AEs)Transfer pricing compliance hinges connected the explanation of Associated Enterprises (AEs).

Under ITA 2025, the explanation has 2 limbs, information successful “management,” “control,” oregon “capital” and specified transactional relationships specified arsenic indebtedness arrangements, guarantees, proviso of intangibles, oregon exclusive proviso of earthy materials.Ambiguity exists connected whether the 2nd limb tin independently found an AE relationship, without satisfying the foundational information test. The existent wording suggests a perchance expansive interpretation, risking overreach.

It should beryllium expressly clarified that transactional relationships alone, without information successful capital, control, oregon management, bash not represent an AE relationship.Taxation of buyback proceedsFinance Act (No. 2) 2024 altered the taxation of stock buybacks by shifting the taxation load from companies to shareholders. Entire buyback proceeds are present taxed arsenic dividend income, irrespective of accumulated profits and without allowing deductions, portion the outgo of acquisition is treated arsenic a superior nonaccomplishment (eligible for set-off).

This departs from the deemed dividend framework, wherever taxation is constricted to accumulated profits.

A much balanced attack would beryllium to taxation buyback proceeds arsenic dividends lone to the grade of accumulated profits, with the equilibrium treated arsenic merchantability information and taxed arsenic superior gains. Additionally, shareholders should beryllium permitted to deduct expenses incurred successful narration to buyback proceeds, accordant with the attraction of different dividend income.Boosting employment-linked deductionsSection 146 of ITA 2025 [corresponding conception 80JJAA of ITA 1961] let a deduction of 30% of further worker costs for 3 years, but lone for caller employees earning up to INR 25,000 per month, a bounds unchanged since 2016. Given wage inflation, this bounds requires upward revision to guarantee relevance and effectiveness successful promoting employment.Timelines for income taxation returns successful concern reorganisationsCurrent provisions licence filing of modified returns pursuing a concern reorganisation lone wherever the archetypal instrumentality has already been filed earlier the reorganisation order.

Where the bid is passed adjacent to the owed day of filing return, taxpayers look compliance challenges. A azygous six months model from the bid day successful each cases would bring much-needed certainty.TDS rationalisationThe ever-expanding scope and complexity of TDS provisions enforce important compliance burdens. Multiple rates, predominant classification disputes and reconciliation challenges crossed Form 26AS/AIS, income taxation returns, GST filings and fiscal statements, often pb to mismatches and imaginable denial of credit.

A wide roadmap to rationalise TDS rates and simplify compliance processes is indispensable to trim litigation and amended easiness of doing business.Other captious expectationsClarity is besides sought for overseas constituent manufacturers who store goods successful India for just-in-time supply, without transferring ownership. A harmless harbour projected successful Budget 2025, remains unnotified and should beryllium operationalised. Similarly, indebtedness waivers pursuant to insolvency solution nether the IBC should beryllium excluded from taxable income and TDS applicability, to sphere a cleanable slate to revived businesses.As Budget 2026 approaches, these targeted reforms tin importantly reenforce India’s committedness for a unchangeable and business-friendly taxation regime.(Shaily Gupta is simply a Partner and Aanchal Jain is simply a Senior Associate astatine Khaitan & Co. Views expressed are personal.)