OPINION | Union Budget 2026 and the road ahead for India’s direct tax regime

Stakeholders are not seeking blanket concessions, but a coherent and predictable tax regime

As India stands on the threshold of another Union Budget, the expectations surrounding Budget 2026 are in-line with the government’s vision of “VIKSIT BHARAT”, as the guiding framework. The Budget is anticipated to focus on measures to accelerate growth across sectors, promote ease of doing business and simplifying compliance, particularly in the realm of direct taxation. The significance of this year’s Budget is further heightened by the imminent replacement of the six-decade-old Income Tax Act, 1961, with the Income Tax Act, 2025, effective from 1 April 2026.

Replacing the terms ‘Assessment Year’ and ‘Previous Year’ with a unified term ‘Tax Year’ to avoid confusion. The proposed shift to a single concept of “Tax Year” in place of the long-standing distinction between assessment year and previous year, reflects an intent to make tax law more intuitive and accessible. Consolidation of scattered provisions and clearer statutory language are expected to reduce interpretational disputes that have historically fuelled litigation. Explicit recognition of virtual digital assets, including cryptocurrencies, within the statutory framework also signals an acknowledgment of evolving economic realities and the need for clarity rather than ambiguity in taxation.

Rationalisation of withholding tax provisions. The current multiplicity of TDS and TCS rates has long been a source of compliance complexity and increased compliance risks. There is a growing expectation that the Budget will move towards a more streamlined structure, possibly by excluding transactions already subject to GST, from withholding requirements, and by introducing standardised rates for the remaining categories. Such a shift would not only ease compliance burden but also improve cash flows for businesses without compromising revenue visibility for the tax administration. A long-awaited set of API’s allowing business to interact more seamlessly with tax portals is also on the want list.

Improvising definition of Significant Economic Presence (SEP) provisions is another area where clarity is awaited. The existing formulation has raised concerns due to its potentially wide coverage, which risks covering both physical and digital transactions within its scope, which ostensibly has not been the legislative intent of BEPS Action Plan 1. Budget 2026 is expected to address these concerns by refining the definition to explicitly include “digital means” and by clarifying disclosure and compliance obligations for non-residents, especially where a permanent establishment already exists in India.

For Foreign Portfolio Investors the delayed implementation of the Protocol to the Mauritius treaty pursuant to the recent decision of the Supreme Court in Tiger Global would be another area that could add certainty to an area that has seen the pendulum swing back and forth.

Uniformity in deduction of stock-compensation expenses continues to be an area of uncertainty and point of litigation. Clear recognition of payments by the Indian employer to foreign parent, with respect to issuance of its shares to the Indian employee as revenue expenditure and certainty on the timing of deductions, would go a long way in reducing disputes.

Similarly, the possible reintroduction of weighted deductions for research and development, extended beyond manufacturing to the service sector, is being seen as a critical lever to foster research and innovation. If extended to companies opting for concessional tax regimes, this measure could significantly boost private sector investment in research and technology.

Beyond these core areas, expectations also extend to resolving long-standing ambiguities in capital gains taxation, particularly in case of the transactions involving contingent consideration. At the same time, procedural reforms such as prescribing timelines for disposal of first appeals could address one of the most persistent pain points in the tax ecosystem, namely prolonged litigation.

Also, dispute resolution needs to be strengthened, and some sort of domestic settlement mechanism is needed to reduce litigation. The Dispute Resolution Panel (DRP) was constituted with this purpose but has not actually performed as a settlement mechanism to settle disputes even issues pertaining to valuation, attribution profits to permanent establishment and transfer pricing. We as a country, have been able to successfully implement a unilateral APA program and so for us to implement a domestic dispute, the resolution process should be quite viable.

One of the key issues regarding timelines for tax assessment involving the DRP process has been contentious and is still pending in the Supreme Court. The new act should be able to address this drafting issue and remove any ambiguity in the future.

As the Budget date approaches, the underlying theme that emerges from these expectations is balance. Stakeholders are not seeking blanket concessions, but a coherent and predictable tax regime that supports growth while safeguarding revenues. Rationalizing tax provisions, extending concessional rates, and fostering research-driven enterprises can serve as key enablers for achieving the “MAKE IN INDIA” mission and the broader vision of “VIKSIT BHARAT”.

(Rohinton Sidhwa, Partner, Deloitte India.)

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