Union Budget 2026

Making India a part of global value chains

The Government should introduce a special bonded logistics park regime to facilitate efficient manufacturing, assembly and re-exports by large multinational corporations (MNCs), as a part of their China plus one strategy and enable such MNCs to make India a part of their global value chains. This could be done by introducing specific legislative amendments related to exempting storage of raw materials and goods in India, just-in-time deliveries without value addition, allowing passive ownership of capital equipment for contract manufacturing, and a simplified alternative taxation regime for the discharge of personal income taxes of foreign employees/technicians visiting India.

Duty exemptions and allowances

The Government should consider extending drawback/Remission of Duties and Taxes on Export Products (RODTEP) benefits on goods manufactured in the Manufacturing and Other Operations in Warehouse Regulations 2019 (MOOWR) premises and exported thereafter. MOOWR regulations should be suitably amended to allow depreciation allowance for computing import duty on capital goods when removed from the bonded premises.

Corporate tax-related expectations

Compliances by non-residents

The law should explicitly provide that non-resident entities with a business connection in India, but no taxability due to tax treaty benefits, are not required to undertake procedural compliances under domestic law, such as obtaining a PAN, filing returns of income, or withholding obligations.

Doing away with the obligation to issue TDS certificates.

The issuance of TDS certificates (in Form 16A) should be made optional for the tax deductors so that they are required to generate and share the certificates, if and when requested by the deductees.

Simplifying the overall process for applying for the Lower Deduction Certificate (LDC) under section 197 of the Act.

Introduction of multi-year Lower Deduction Certificate LDC facility enabling eligible taxpayers to apply for and receive certification for reduced or nil tax deduction rates over a predefined period, spanning multiple years (e.g. 2-3 years)

Indirect tax related expectations

Proposed changes in Authorised Economic Operator (AEO) Certification such as:

• Renewal of AEO status to be granted basis a self-declaration that the entity continues to maintain the required standards.
• AEO Certification in case of merger between entities should be continued.
• Rationalise the requirement for fulfilling the conditions from both fiscal and legal perspectives.

Others

• Automation and online disbursal of custom duty refunds and deposits including facility for online amending and consequent refunds.
• Introduction of a centralized Appellate Authority for GST Advance Rulings – in certain scenarios till date, the industry has had different outcomes for the same issue before different state-level advance ruling authorities, leading to lack of clarity and certainty. A centralised Appellate Authority for GST Advance Rulings can go a long way in resolving this issue.

• Bringing in specific rate slabs for imported goods, making clear differentiation between primary goods, intermediate and value-added goods.
• Review of the products covered under inverted duty structure for imported products, especially with respect to free trade agreement (FTA) imports.

Corporate tax

Extension of the sunset clause for reduced tax rate for manufacturing companies:

The concessional corporate tax rate of 15% was available to new domestic manufacturing companies under section 115BAB, which commenced manufacturing operations before 31 March 2024. The Government should consider extending the deadline, with appropriate safeguards, beyond 31 March 2024, and focus on the inclusion of critical sectors such as semiconductor chip designing, AI, EV’s, and data centres.

Indirect tax

• Clearly laying out customs duty rates for a longer period and the requirement of revisiting the rates (only on exceptional cases) on all products – especially the intermediate and raw materials for certainty of investments in manufacturing, vis-a-vis the localisation
• Introduction of at least a five-year timeline for sunset dates in the existing exemption notifications
• Reintroduction of 5% tax rate for interest to boost foreign investment in Indian debt markets
• Expansion of Production Linked Incentive (PLI) scheme to new sectors such as EVs, green hydrogen, etc.

Exemption from deemed dividend provisions to finance company

The Act deems loans or advances by closely held companies to their certain categories of shareholders or related concerns as dividends, unless they are given in the normal course of money-lending business. This applies to International Financial Services Centre IFSC and foreign companies as well. This may discourage multinational groups from setting up their corporate treasury centres in IFSC as finance companies. The deemed dividend provisions should not apply to any loans or advances extended by finance companies located in IFSC.

Establishment of dedicated assessment wing in IFSC

A dedicated tax office should be set up in GIFT-IFSC exclusively for dealing with the income -tax issues of the entities registered under IFSC so as to make the tax process easier and faster for them and to encourage more foreign investment and activity in the zone by providing them with a stable and transparent tax system

Exemptions on transfer of equity shares listed on IFSC stock exchange

To promote listing and increase capital inflow into the IFSC, the current tax exemption on capital gains from the transfer of assets such as bonds, global depository receipts, and derivatives listed on recognised stock exchanges in the IFSC should be extended to include equity shares listed on recognised stock exchanges in the IFSC.

Relocation of funds in IFSC from foreign jurisdiction

• Extension of sunset clause: Currently, transfer of assets pursuant to the relocation by original fund (i.e. fund located in the foreign jurisdiction) to the resultant fund (i.e. category I/II/III AIF in IFSC) is a tax neutral transfer, with a sunset clause up to 31 March 2025. This sunset clause should be further extended to attract more foreign players to GIFT City.
• Enabling tax neutral relocation of retail funds: Presently, the benefit of tax neutral relocation can be availed only if the resultant fund is a Category I/II/III AIF in IFSC. Such benefit should also be extended to enable the relocation of retail schemes, facilitate the onshoring of offshore funds.

Taxing buy-back proceeds as dividends

Section 68 of Companies Act 2013 permits buyback out of (a) retained earnings or (b) share premium or (c) proceeds of issue of another type of shares or securities. Hence, where a buyback is actually made out of share premium or proceeds of issue of another type of shares/securities, the new regime will lead to artificial taxation of capital receipt as dividend income. It should be clarified that the buyback proceeds should be treated as dividends only to the extent the company undertaking the buyback possesses accumulated profits. The balance consideration should enter the capital gains computation in a manner similar to capital reductions and liquidations.

Rationalisation of Significant Economic Presence (SEP) provisions

The import of physical goods should be expressly kept outside the purview of the SEP provisions. It is also recommended to bring out the rules for computing profits which can be attributed to an SEP in India. In addition, to reduce compliance burden, exemption should be provided from procedural requirements (like obtaining PAN, filing return, etc.) where SEP is triggered but treaty protection is available.

Making Safe Harbour Rules (SHR) more attractive

The high margins and low turnover thresholds prescribed for certain transactions have made the SHR, in its current form, unattractive . While the finance minister, had expressed the Government’s intention to expand the scope of the current SHR in last year’s budget speech to make it more attractive, there has been no major announcement on this yet. The Government should also provide a window to move pending cases from the advance pricing agreement (APA) programme or Tribunals/ Courts to the SHR programme. The rationalised SHR may also be incorporated as an accelerated APA option where eligible taxpayers can opt for this as an accelerated APA instead of a full APA process.

Enable mediation/ negotiation in TP assessments

At present, the resolution of TP issues through appellate/ judicial forums is a long-drawn and time-consuming process. Setting up an alternate dispute resolution mechanism in the form of a non-mandatory/ non-binding process of mediation at the time of assessment/ appellate stage, designed to arrive at a fair and agreed quantification of change in transfer prices, should thus be enabled. This mechanism should prevent the creation of disputes that would, in normal course, have travelled to higher appellate levels leading to a quick resolution of TP issues and tax certainty.

Valuation

• Valuation methodology in case of related party importation should be aligned from TP and customs valuation perspective in form of common APA.
• Alternatively, a mechanism similar to Advance Customs Valuation Arrangement (ACVA) followed in Korea by the Korea Customs Service (KCS) can be adopted in India.

• To roll out self - declaration based origin certification (for designated status holders) for the existing and upcoming FTAs.
• To introduce Electronic Origin Data Exchange System (EODES) for online exchange of certificate of origin and related information in all the existing and upcoming FTAs.

Corporate tax

The Government should look to bring in clarity and certainty for addressing Permanent Establishment and income attribution related issues being faced by data centres in India.

Indirect tax

Dedicated capex import scheme for promotion and establishment of data centres.

• Removal of inverted duty structure on electronic vehicles (EVs)
• GST rate rationalisation on inputs used in the construction of green hydrogen derivatives, including renewable plants, electrolysers.
• Inclusion of natural gas within the ambit of GST

• Tax incentives for GCC: India has emerged as the leading hub for MNCs establishing GCCs in India. The Government, in order to encourage more companies to set up their GCCs in India, which help in large-scale job creation, should look to introduce a concessional tax rate like that for manufacturing companies, along with providing clear transfer pricing (TP) safe harbour rules to determine the service income to be charged from associated enterprises.
• GST rate rationalisation on inputs used in the construction of Green Hydrogen derivatives, including renewable plants, Electrolysers, etc
• Customs duty exemptions: Investment-linked customs duty exemptions should be introduced for GCCs.

The role of entrepreneurial and private business (EPB) is very important for the growth of the Indian economy as it contributes upwards of 70% of the gross domestic product (GDP) of the nation [RG1]. In addition to driving job creation and innovation, EPBs boost the economic growth of the country. While the Indian economy is striving towards reaching USD 5 trillion by 2027 [RG2] and achieving the subsequent vision of ‘Viksit Bharat’ by 2047, the expectations associated with Union Budget 2025 are inclined towards transformative measures which will be necessary to fulfil the evolving needs of this prime segment.

Budget 2024 gave the boost to the EPB sector with its INR 1 lakh crore [RG3] innovation fund and the abolition of the angel tax. To give it further momentum, the focus for 2025 will include creating a very robust, inclusive and future-ready environment for EPBs.

The key expectations from Budget 2025 will be as follows:

• Enhancing financial accessibility: EPBs anticipate strengthening of financial support through expanded credit guarantees and financing mechanisms where the expectations include extending the Emergency Credit Line Guarantee Scheme (ECLGS), which will support emerging sectors like renewable energy and AgriTech. Also, tax-free green bonds and subsidies for businesses investing in areas like sustainability are expected to encourage environmentally responsible practices.
• Simplified and equitable taxations frameworks: Taxation reforms and simplification remain a priority. The expectations not only include reduced corporate tax rates for mid-size businesses but also to encourage reinvestments and boost competitiveness for them. Moreover, ensuring tax neutrality during business restructuring among LLP[RG4] s and simplified Goods and Services Tax (GST) compliance – particularly for micro, small and medium enterprises (MSMEs) – is also expected.
• Focus on digital transformation and innovation: EPBs in the ever-changing market dynamics are looking forward to strengthening the support on innovation through higher R&D tax incentives, especially in the high for technologies[RG5] like AI (generative AI), electric vehicles and HealthTech. A firm support for digital adoption, like subsidies for integrating digital tools, cloud computing and advanced analytics, is expected to help businesses enhance their productivity, scalability and competitiveness in the market.
• Tax concessions on reinvested dividends: Introducing a concessional tax rate on dividends reinvested into companies within a specified time (e.g. 1 year) could encourage corporations to reinvest their profits and foster growth.
• Enabling family settlements: Providing tax exemptions on assets transfer during family settlements among family-owned businesses can support smooth succession planning and ensure continuity in business operations.
• Promoting employment and inclusivity: Tax incentives to boost hiring, especially for women and first-time workers, are highly sought. Expansion of skilled programmes in IT, green energy and manufacturing, along with financial aid for women-led businesses, can be the key to fostering inclusivity.
• Support for Gujarat International Finance Tec-City (GIFT City): Exempting dividends earned within and from GIFT City could be a transformative step in attracting investments and cementing India’s position as a global financial hub.

Union Budget 2025 is anticipated to introduce a practical solution to the challenges faced by EPBs while facilitating growth and innovation. Key measures like streamlining financing, simplifying tax compliance, encouraging digital transformation and boosting employment, will thus be crucial for fostering a robust and inclusive economy.