Union Budget 2026 and India’s Evolving Global Tax Framework

As the Indian economy achieves a significant milestone in its foreign investment journey, with gross FDI rising nearly 19.4% to $51.8 bn in April-September 2025-26, the discussions surrounding Union Budget 2026 have transitioned from rate-reduction pleas to a more meaningful demand: revenue balance and tax certainty.

In parallel, global tax norms are undergoing a structural reset driven by OECD-led BEPS initiatives, increased information exchange and scrutiny of cross-border arrangements. Against this backdrop, Budget 2026 will be a test of how effectively India can align domestic tax administration with evolving international standards without eroding its investment appeal.

Cross-Border Business Realities and Emerging Global Tax Standards

The global investment landscape has shifted. Historical data shows that Mauritius, which once contributed nearly 34% of overall FDI, saw its share decline sharply following the 2017 treaty amendments and the introduction of General Anti-Avoidance Rules (GAAR)

These developments reflect India’s broader shift toward substance-based taxation, consistent with global treaty practices under the Multilateral Instrument (MLI).

The signing of the March 2024 Protocol introducing the Principal Purpose Test (PPT) added further complexity. While the January 2025 CBDT Circular provided welcome relief by clarifying that grandfathered (pre-2017) investments remain outside the PPT’s reach, government’s message is clear: India is transitioning from treaty-driven investments to substance-based investment.

To facilitate this shift, Budget 2026 must codify profit attribution rules for Permanent Establishment (PE) and objective guidelines for Significant Economic Presence (SEP), moving away from subjective value creation arguments toward predictable thresholds.

Commercial Laws Have to Move in Tandem

To maintain India’s position in global supply chains, the tax code must evolve in tandem with corporate law. The Ministry of Corporate Affairs recently broadened fast-track merger provisions under Section 233 of the Companies Act, 2013 (effective September 2025), enabling unlisted firms and foreign holding companies to reorganize The Income-tax Act, 2025 currently lacks parallel provisions for tax neutrality in fast-track demergers. Industry therefore expects Budget 2026 to bridge this gap.

Similarly, aligning the holding period for slump sale transactions (currently 36 months) with other long-term assets (24 months) would establish consistency.

Enhancing Attractiveness of GIFT City

The ambition to position GIFT City as a global financial gateway requires further policy shift and the removal of residual tax frictions like tax on dividend for non-residents investing through Gift City.

While Budget 2025 clarified the non-applicability of deemed dividend provisions for listed MNE groups, this benefit remains unavailable to unlisted groups. Extending this clarity would enable unlisted MNEs to leverage the IFSC for global cash pooling and treasury operations, allowing GIFT City to compete meaningfully with jurisdictions such as Singapore and Dubai.

Addressing the Transition Gaps

The enactment of the Income-tax Act, 2025, to replace the Income-tax Act, 1961 marks a defining moment for India. While the new Act represents a commitment to transparency and simplification, the transition from the old Act remains a potential flashpoint for litigation. Transitional issues such as carry-forward of losses, grandfathering of incentives, treatment of ongoing assessments, and reopening timelines could become immediate sources of dispute. To ensure that the legislative milestone does not become an administrative tangle, Budget 2026 must provide the procedural framework necessary to sustain investor confidence.

Tax Certainty and Rationalising the Compliance Burden

The Central Action Plan 2025-26 offers a paradoxical picture. On one hand, the Department achieved a historic 155% increase in appeal disposals (1.72 lakh cases), leading to the first-ever year-on-year drop in pendency as of April 1, 2025. On the other, a staggering 5.39 lakh appeals remain pending. Limited administrative bandwidth at the First Appellate Authority has led to prolonged timelines, raising provisioning, blocking working capital and increasing risk premiums for foreign investors. Strengthening appellate capacity is therefore essential expectation from stakeholders to maintain India’s credibility as a dispute-resilient jurisdiction.

In FY 2024-25, the CBDT signed a record 174 Advance Pricing Agreements (APAs), including 65 bilateral APAs, the highest ever in a single year demonstrating a strong move toward providing certainty and reducing cross-border transfer pricing disputes for MNEs. Budget 2026 is anticipated to further strengthen the APA framework to furnish MNEs with tax certainty and greater predictability.

The fragmented Tax Deducted at Source (TDS) regime with multiple rates ranging from 0.1% to 30%, has become a triggering ground for classification disputes and cash-flow blockages. Budget 2026 should introduce a roadmap to consolidate these into minimal rates, as the original intent behind TDS was revenue-leakage tracking rather than revenue collection. Given this intent, industry also expects exemption from TDS on B2B payments already subject to GST, where transaction-level visibility is independently available.

Conclusion

As India stands on the cusp of a new financial year, the Government’s challenge is not confined to attracting capital, it is equally about retaining it. In a competitive global capital market, predictability and administrative restraint increasingly matter as much as statutory incentives. By balancing robust anti-avoidance measures aligned with BEPS and MLI standards with administrative simplification and clarity, India’s income tax framework was built on the principle of self-assessment rather than investigative assessment, a foundational idea that must be reaffirmed through policies and administrative conduct to ensure India’s FDI foundation remains resilient and globally competitive.

Rahul Charkha is Partner and Srishti Agrawal is Advocate at Economic Laws Practice.

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