OPINION | Here’s how Budget 2026 can power M&A activity

The finance minister should consider tweaking the plotlines in the upcoming Budget to ensure that the future M&A transaction.

In February last year, the finance minister presented before the nation a meticulously written script. It was no blockbuster laden with plot twists, but rather a crisper and modern reinterpretation of the 1961 classic.

The script was finally transformed into the much awaited “Income-tax Act, 2025”, (“ITA 2025”) in August, 2025, and is scheduled to premiere on April 1, 2026. Consequently, the impending Union Budget, 2026 (“Budget”) offers the finance minister to deliver the final director’s cut and ensure that the ITA 2025 is recalibrated to meet the fiscal needs of the nation, before its grand release date.

Tax neutrality needed for fast-track demergers

While the underlying theme of the ITA 2025 has been to present a viewer friendly narrative, the finance minister should consider tweaking the plotlines in the upcoming Budget to ensure that the future M&A transaction, which have become critical to achieve scale and efficiency in the current geopolitical scenario, do not become entangled in the plot twists of archaic laws.

One of the prime demands in this respect has been to extend tax neutrality to fast track demergers. Fast-track demergers essentially enable small or closely held companies to undertake demergers without NCLT approval.

However, the ITA 2025 only extends tax neutrality to NCLT approved demergers under section Sections 230 to 232 of the Companies Act, 2013 and excludes fast track demergers under Section 233 of the said Act.

Fear of manipulation

The rationale for this exclusion, as supplied by the finance ministry, is that such demergers may be susceptible to valuation manipulation in the absence of court oversight. However, this proposal appears contrary to the underlying agenda of ensuring ease of doing business.

If the ITA 2025 were to be enacted in its current form, genuine taxpayers would be forced to either forgo the speed and efficiency of a fast track demerger or to bear additional tax liability and lose the benefits of carried forward losses. In this backdrop, the budget comes at the opportune moment for the finance minister to execute relevant edits, ensuring that the protagonist, which was sought to be protected, does not end up being penalised.

Adapting to a contemporary trend in M&A deals

Another area, that requires the finance minister’s consideration is the taxation of earn-out/profit linked or contingent consideration. Of late, it is a has become increasing common in the M&A transactions for part of the sale consideration to be contingent upon achievement of profitability or other financial milestones. However, the law as it currently stands, does not provide a clear picture on the taxability of such consideration, especially the timing of the taxation. Hence, the finance minister should consider providing appropriate clarity to ensure this recurring issue does not continue as an unresolved the sub-plot of India’s M&A narrative.

Additionally, certain plot holes in the Income-tax Act, 1961 have not been rectified in its modern adaptation. Currently, a foreign company is exempt from tax on capital gains arising from direct or indirect transfer of shares of an Indian company, pursuant to its merger with another foreign company, albeit subject to satisfaction of certain conditions. However, the law does not provide for any specific exemption to the shareholders of the amalgamating company, who may become liable to pay capital gains tax in India on gains arising from swap of shares in the amalgamating entity, for shares of amalgamated entity.

This appears to be an anomaly, especially considering that domestic mergers are exempt, both, at the company and shareholding level. Thus, the Budget may consider tightening the plot through specific clarificatory amendments.

Opportunity cost to changes in capital gains

Separately, the recent rationalisation of capital gains tax regime had come with its own plot twist, namely a higher long-term capital gains tax rate. This increased capital gains tax rates directly erode the post-tax returns and adversely impact the exit efficiency for the investors, compelling them to route their money to competing jurisdictions, with more benign tax regimes.

Accordingly, while this simplification exercise did earn admiration and applauses, the high-ticket price it came with has prevented it from being a hit. If India seeks to compete with other investor friendly jurisdictions and attract foreign capital, the Budget must seek to change this storyline and offer reduced capital gains tax rate, at the least restore the earlier rate of 10%.

This Budget- the final director’s cut, offers a great opportunity to the finance minister to project to the world that India’s tax framework has evolved to meet cross border structuring needs. And in the end, such Budget-led amendments should surely ensure that India is positioned as the ‘hero’ of ease of doing business, where regulatory laws and tax frameworks share the same narrative of corporate growth.

(Kunal Savani is Partner and Bipluv Jhingan is Principal Associate, Cyril Amarchand Mangaldas.)

Views are personal, and do not represent the stand of this publication.