Budget 2026’s Tax Test: India needs fewer tax tangles and more investment muscle

The current year has been significant in India’s tax reforms journey. It focused on structural simplification through the new Income tax Act, 2025, bringing greater ease of compliance and boosting consumption by providing tax relief for individual taxpayers.

Budget 2026 must carry forward the reforms process to further reduce complexity, enhance certainty, build trust and boost investments. Some areas that need attention are discussed below.

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Rationalise TDS to simplify compliance and avoid disputes

With 37 different types of payments to residents where TDS rates vary from 0.1% to 30%, TDS provisions become a fertile ground for disputes relating to categorisation and interpretation. In many instances, industry faces cash flow blockages awaiting refunds, and the government incurs avoidable interest cost on such refunds.

Finance (No.2) Act 2024 reduced TDS rates from 5% to 2% on several payments. As the next step, Budget 2026 should lay down a roadmap for the rationalisation of TDS rate structure. A three-four rates structure with TDS on salary at slab rate, TDS on lotteries/online games etc. at maximum marginal rate and two standard rates for TDS for different categories may be considered.

B2B payments subject to GST may be exempted from TDS as information relating to such transactions is already captured in Form 26AS/AIS. A ‘negative list’ of payments which will not be liable to TDS may be notified. These can include payments to senior citizens, exempt income payments, and payments to banks and financial institutions, to name a few.
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Rationalise buyback provisions to remove anomalies

Currently, the entire consideration from ‘buy-back’ of shares is deemed as dividend in the hands of the shareholder and taxed accordingly. In situations where a buyback is made using share premium (e.g., by a loss-making company) or proceeds of issue of another type of shares/securities, it results in artificial taxation of capital receipt as dividend income.

Countries like China, Brazil, Malaysia and Russia treat share buybacks as capital gains. Others like Australia, UK and Netherlands treat buyback as dividend only to the extent of distribution of profit and not for the capital component. In US, share buybacks are generally treated as capital gains and exceptionally treated as dividend to the extent of profits if there is no meaningful reduction in shareholder’s proportionate interest.

The Budget should address this anomaly by providing a carve-out for buybacks using share premium or proceeds of another issue of shares/security i.e., where retained earnings/accumulated profits are not distributed to the shareholders. Even in case of buyback from accumulated profits, a deduction should be allowed for the cost of shares. Relevant rules can be prescribed on lines of the erstwhile buyback distribution tax regime before 2024.

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Facilitate consolidations in services sector

Section 72A of the current tax law permits carry forward of loss and accumulated depreciation in case of amalgamation, only to certain specific types of companies such as those owning an industrial undertaking. However, companies in other sectors, e.g. organized retail/ trading, etc. are generally not eligible for such benefits thus discouraging companies in these sectors to consolidate, ensuring not just survival but enhancing business competitiveness. Most countries like US, UK, Singapore and China permit such transition based on business continuity or ownership continuity condition.

With due safeguards (like continuity of employees), the government should remove sectoral restrictions under Section 72A and allow transition and set-off of accumulated business loss and unabsorbed depreciation in amalgamation for all sectors. Finance Act 2025 restricted the carry forward of business loss to the unexpired period in the hands of the amalgamating company as against the fresh period of 8 years available earlier. Thus, there is greater rationale to remove sectoral restrictions on lines of demerger transition provisions.

Also read: Move 30% tax slab to Rs 40 lakh income: Four compelling reasons why Budget 2026 should revise 30% tax slab in new income tax regime

Remove notional taxation on transfer of shares in bonafide transactions

Currently, in case of transfer of shares, both the seller (for unlisted shares) and the buyer (for both listed and unlisted shares) face notional taxation if transaction value is less than the normative fair value as determined under the prescribed rules. The objective of such tax treatment is to counteract any abusive cases of bogus capital building through artificial undervaluation or unaccounted incomes. However, such tax approach impacts genuine transactions too, where the transaction/deal price is lower than normative fair value as per the tax valuation rules, even though this is not the intent of the law.

Considering the clear purpose behind the relevant provisions, and to avoid any unnecessary litigation in this regard, Budget 2026 should exclude from the purview of sections 50CA and 56(2)(x), genuine bonafide transactions of transfer of shares where transaction price is lower than such prescribed fair value. Sufficient safeguards may be put in place in this regard to prevent abuse.

Similarly, it should be clarified that in the case of a binding contract between the buyer and seller, the prescribed fair value as on the date of signing (as distinguished from the date of closing i.e. the date of eventual transfer of the shares) would be looked at and would be compared with the actual transaction price.

Also read: Union Budget 2026-27 Key Expectations

Budget 2026 must prioritise certainty to encourage investments

Businesses, entrepreneurs and investors highly value tax clarity and certainty while planning investments. Providing the right ecosystem can go a long way in enhancing the global competitiveness of Indian businesses, and indeed, in attracting global capital.

The government has taken an excellent initiative to simplify the Income tax law and to cut complexities. The next agenda must be to remove irritants that cause avoidable disputes. Especially, the huge pendency of litigation before the first appellate authority must be reduced. This will unlock revenues for the government and provide much relief to taxpayers – a win-win for all.

The author is Partner & National Leader – International Tax and Transaction Services at EY India