backdrop of significant geopolitical uncertainty, the Finance Bill 2026, while aimed strongly at promoting
growth and maintaining the international competitiveness of the Indian economy, continues to have a hawkish
focus on lowering the fiscal deficit and debt to GDP ratio. The budget predicts a nominal GDP growth of 10%,
with a real GDP growth projected at 7% to 7.5%. On the policy front, the following key points being made by
the FM:
Manufacturing, Clusters and Exports Push
- Focused schemes for textiles, fibres, footwear, and leather, plus revival of 200 legacy industrial
clusters and targeted customs tweaks, are aimed at building globally competitive, job‑rich
manufacturing value chains.
Energy Transition and Tech as Growth Drivers
- Duty support for batteries, solar glass, and EV components, alongside AI/data‑centre and digital
services initiatives, positions green energy and technology as core long‑term growth and investment
themes.
Deepening of the Debt Market
- Introduction of a market‑making framework for corporate bonds, with “suitable access to funds” and
derivatives on corporate bond indices to improve secondary‑market liquidity and price discovery.
- Launch of total return swaps on corporate bonds, enabling investors to take or hedge exposure
without holding the underlying bond, supporting more sophisticated risk‑management and participation
including foreign institutional investors (FIIs), insurers, and pension funds.
- Plan to develop derivatives on corporate bond indices, expected to tighten spreads, create benchmark
curves, and support passive and active credit strategies.
Other Key Policy Announcements
- Comprehensive review of the Foreign Direct Investment regulations in India.
- Incorporating the requirements of Income Computation and Disclosure Standards (ICDS) into the Indian
Accounting Standards (IndAS) itself and hence scrapping the ICDS requirements.
- Creation of a dedicated Real Estate Investment Trust (REIT) for Central Public Sector Enterprises
(CPSEs).
Tax Proposals
From a taxation perspective the following key changes are being proposed in addition to now implementing the
new Income-tax Act, 2025.
Tax Rates Including Withholding Tax and Tax Collection at Source
- Tax rates have remained unchanged for most taxpayers other than Securities Transaction Tax (STT)
rates on derivatives, which are proposed to be increased as under –
- From 0.1% to 0.15% of the option premium on sale of Option in Securities
- From 0.125% to 0.15% of intrinsic value on sale of Exercised Option
- From 0.02% to 0.05% of the traded price on sale of Future in Securities.
- Tax collection at source (TCS) rates for LRS remittances for education/ medical purposes (subject to
threshold of ₹10 lacs i.e., approx. USD 11,000) and overseas tour packages as well as sale of
certain other specified products are proposed to be rationalized to a uniform rate of 2%.
Mergers and Acquisitions (M&A)
Buyback of Shares
Transfer Pricing
- The issue of the manner of computation of sixty days for passing an order by the Transfer Pricing
Officer is proposed to be clarified by prescribing fixed calendar cut-off dates. This retrospective
amendment directly addresses judicial precedents where TP adjustments were quashed on limitation
grounds.
- It is proposed that Associated Enterprises impacted by an Advance Pricing Agreement (APA) will be
permitted to file a return or a modified return, in addition to the APA signatory. This addresses
the jurisdictional mismatch that resulted in economic double taxation in APA cases and allows
corresponding income alignment and refund claims.
- A time-bound process has been proposed in the Budget Speech for concluding unilateral APAs for IT
services, with a targeted completion period of two years.
- The issue relating to the interaction between assessment timelines in cases following the Dispute
Resolution Panel (DRP) route and the overall time limit for completion of assessment is proposed to
be addressed by separating the timelines applicable to cases proceeding through the DRP from the
general assessment deadlines.
- In the Budget Speech, inter-connected IT services including software development, IT-enabled
services, Knowledge Process Outsourcing (KPO), and contract R&D, are proposed to be consolidated
into a single “Information Technology Services” category, subject to a uniform safe harbour margin
of 15.5%. The eligibility threshold is proposed to be increased from ₹300 crores to ₹2,000 crores.
Corporate Tax
Benefits to IFSC Units and OBUs
- Units in International Financial Services Centre (IFSC) and Offshore Banking Units (OBUs) are
eligible for a tax holiday. This tax holiday is for a period of 10 consecutive years in a block of
15 years for IFSC units and 10 consecutive years in case of OBUs. This tax holiday period is now
proposed to be extended to 20 consecutive years in case of OBUs and 20 consecutive years in a block
of 25 years in case of units in IFSC. Further, a lower tax rate of 15% (instead of the current 22%)
is proposed for such units post the tax holiday period.
- In the case of OBUs or units in the IFSC referred above, commencing operations on or after April 1,
2026, formed by splitting up, reconstruction, reorganization, or transfer of an existing Indian
business, no tax holiday will be available.
- Currently, loans or advances between group entities routed through a Global Treasury Centre (GTC)
located within an IFSC are exempt from deemed dividend provisions, provided the parent or principal
entity of the group is listed on a stock exchange outside India. It is proposed to add a condition
that the counterparty group entity in such transactions must be located in a notified foreign
jurisdiction, thereby tightening the scope of this exemption. Also, the definition of the term
‘parent’ is sought to be broaden to also cover entities which exercise control over more than half
of the voting power or control the board of directors.
MAT Exemption and Rationalization
- The Minimum Alternate Tax (MAT) rate under the old tax regime is proposed to be reduced from 15% to
14%, and MAT would be the final tax. Consequently, no carry forward of MAT credit to subsequent
years will be allowed.
- Brought forward MAT credits (i.e., accumulated up to March 31, 2026) are proposed to be available
for set-off only for Indian companies opting for the lower tax rate regime (capped at 25% of the tax
liability for the relevant year) and foreign companies (to the extent of the difference between
normal tax and MAT for the year).
- MAT exemption to be extended to non-residents who have opted for presumptive taxation for the
business of operating cruise, ships and providing services or technology in relation to electronics
manufacturing in India.
Due Date for Depositing Employee’s Contribution to Welfare Schemes
- The due date for the employer to claim a deduction for depositing the employees’ contribution to
welfare funds (PF, ESIC, etc.) to be revised from the statutory due date prescribed under the
respective laws to the due date for filing the return of income.
Non-life Insurance Companies to be Allowed Deduction in the Year of Payment of Withholding Taxes
- In the case of non-life insurance companies, existing provisions do not permit a deduction for
expenses in the year of deposit of withholding taxes, which is generally available to other
taxpayers. It is now clarified that the amounts disallowed for non-withholding of taxes shall be
deductible in the subsequent tax year when the withholding taxes are deposited.
Tax Relief for Foreign Companies Procuring Data Centre Services
- To encourage investment in data centres and support India’s AI focused data centre framework, it is
proposed to grant an exemption to notified foreign companies on income earned from procuring
services from a specified data centre in India. The exemption would be available up to tax year
ending March 2047, and would be subject to following conditions:
- The foreign company does not own or operate physical infrastructure of the data centre.
- Sales to users in India must be routed through an Indian reseller entity.
- Maintenance and furnishing of requisite information in the prescribed form and manner.
Rationalizing Penalty and Prosecution
- Integration of penalty and assessment proceedings: To avoid multiplicity of
proceedings, penalty proceedings for under-reporting/misreporting of income is to be included under
the assessment or reassessment order itself. Thereby eliminating the requirement for separate
penalty proceedings. Further, interest on the penalty demand is to be charged only after the order
of the appellate commissioner/tribunal is passed.
- Misreporting of income also to be eligible for immunity from penalty and prosecution</strong >: Immunity from penalty to be extended even to cases of misreporting of income. This is subject to
payment of the applicable tax and interest, additional income tax equal to 100% of the tax payable
on the misreported income and non‑filing of appeal.
Other Miscellaneous Proposals
- A clarification has been proposed that the authority responsible for conducting pre-assessment
enquires and issuing re-assessment notices, shall be an Assessing Officer other than the National
Faceless Assessment Centre or its Assessment Units. This retrospective amendment addresses the
conflicting judicial precedents.
- No deduction for interest expense against dividend or mutual fund income (earlier allowed subject to
a 20% cap).
Indirect Tax Proposals
Key GST Proposals
- The place of supply of “intermediary services” to be amended from location of supplier of service</u > to location of recipient of services (effective from the date of assent of the Finance Bill
2026). Indian suppliers of intermediary services may evaluate zero rating of supplies owing to this
amendment.
- Various trade facilitation measures, pertaining to refunds and deduction for post supply discounts
as recommended in the 56th GST Council meeting, to be incorporated from a date to be
notified.
- Government to be empowered to notify any existing authority constituted under any law for the time
being in force to hear appeals made to the National Appellate Authority for advance rulings.
Key Customs Proposals
Tariff rationalization measures undertaken covering:
- Grant of customs duty exemptions for sectors of importance such as pharmaceuticals, renewable
energy, nuclear power generation, aircraft, and consumer durables.
- Withdrawal of exemptions/concessional rates where the goods are being domestically manufactured or
imports are negligible.
- Incorporation of effective rates within the tariff and corresponding deletion of
exemption/concessional rate.
- Review and extension of sunset dates for exemptions/concessional rates, where deemed necessary.
Other Trade Facilitation Measures
- Deferred payment of import duty to be allowed for “eligible manufacturer importer” up to March 31
2028. Further, duty deferral period for Tier II & III Authorized Economic Operators to be
extended to 30 days from 15 days.
- Validity of advance rulings to be extended from three years to five years or till there is a change
in law or facts on the basis of which the advance ruling has been pronounced, whichever is earlier.
- Trade facilitation measures envisaged for fast tracking cargo clearance including leveraging
Authorized Economic Operator status.
- Integrated single window for facilitation of various agency approvals to be rolled out by March
2027.
Conclusion
From a tax perspective with the new simplified Income-tax Act 2025, now in force, the focus of the FM was
more on providing clarity and reducing ambiguity on some contentious provisions while continuing to support
key sectors and areas (such as data centres and IFSC GIFT city). That said, certain unfinished agenda items
remain, such as implementation of Base Erosion and Profit Shifting (BEPS), additional certainty to fund
managers managing funds of offshore entities, etc., which we hope would be addressed over time.
[1] “Promoters” means, in the case of listed companies, promoters as defined under the SEBI (Buy-Back of Securities) Regulations, 2018, and in other cases, promoters as defined under the Companies Act, 2013, and includes any person holding, directly or indirectly, more than 10% of the shareholding in a company.
[2] Tax rates are excluding applicable surcharge and cess
