OPINION | Union Budget 2026: Key tax issues shaping M&A activity 

Tax

As India looks to sustain deal momentum amid global uncertainty, tax clarity has become as critical as tax rates. For the M&A ecosystem, Budget 2026 comes at a time when deal structuring is increasingly shaped by tax certainty, dispute risk and execution timelines. The Budget therefore presents an opportunity to address issues that continue to influence deal activity.

Clarity after the Tiger Global judgement

As the taxpayers and advisors prepare for the landscape post the Supreme Court’s Tiger Global judgement, it is critical that the government provides clarity particularly on the fate of past cases and concluded transactions. Guidance on the applicability of the General Anti-Avoidance Rule (GAAR), especially for investments made before 1 April 2017 which were grandfathered, would help reduce uncertainty and potential litigation.

Tax neutrality for fast-track demergers

Section 233 of the Companies Act was introduced to expedite demergers and to make intra-group and smaller restructurings faster. Such demergers though fast tracked still require filings with the regulator and compliances to be undertaken. As per the government, fast track demergers are not tax neutral since they are not court-monitored and thus could potentially result in tax avoidance. In the absence of tax neutrality of demergers, the fast-track option becomes commercially meaningless. Apprehensions of the revenue could be addressed through clear valuation norms, further, GAAR could help address any avoidance arrangements. That would align tax policy with the stated ease-of-doing-business intent.

Service sector mergers

Given the increased prominence of the service sector in India growth story, it would be pertinent to extend the benefit of carry forward of losses in the case of mergers of service sectors and should not be restricted to manufacturing/hotels/industrial undertakings.

Tax certainty for global capability centres (GCC) in India - supporting a strategic growth engine

GCCs in India have been rapidly growing with many multinationals setting their GCCs in India due to availability of skilled labour at reduced costs, ease of language, political stability and business friendly environment. With the growth of GCCs, host of tax aspects become relevant including permanent establishment (PE) concerns. It would be helpful if the government comes out with some safe harbours from PE rigours especially on cross-border secondments and remuneration for the GCCs including introduction of concessional tax regimes for GGCs, data centres, etc.

Tax neutrality for cross-border mergers and restructurings

Indian businesses are increasingly global in their footprint and investor base. Yet outbound mergers, where an Indian company merges into an overseas company, often face immediate tax implications even when there is no monetisation. One of the long-standing demands of the tax community has been for the government to provide neutrality on outbound mergers or business combinations. While there are provisions providing exemption to inbound mergers, lack of clarity on outbound mergers has often caused hinderances in Indian companies going global.

Also, in the case of foreign mergers, particularly with wholly owned subsidiaries, tax neutrality is uncertain since the condition of issuing shares to oneself, required for tax neutrality, is practically impossible to fulfil. This condition is already relaxed in the case of domestic mergers. A similar relaxation should be extended to foreign mergers, along with a shareholder-level exemption where such mergers indirectly result in the transfer of Indian share.

Other clarifications

Taxpayers would also expect clarifications on safe harbours for buying out listed companies through the off-market process from the trigger of Section 56(2)(x) of the Income-tax Act, 1961, since at occasions, it can be difficult to match the market price, especially where there is gap between signing and closing of the transaction. In addition, rationalising the holding period for slump sales, currently set at 36 months, as against 12 or 24 months for most of the asset classes, could be a welcome step. Further, clarity on the timing of taxation of contingent consideration, by taxing such amounts as capital gains only upon actual crystallisation rather than upfront at closing, would better align taxation with the commercial realities of milestone-based M&A transactions.

With Budget 2026 around the corner, targeted interventions in these areas could go a long way in improving business sentiment, reducing disputes and enabling deal activity that supports economic growth.

(Vinita Krishnan is Executive Director and Bharat Jain, Principal Associate at Khaitan & Co.)

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