Expert Insights: Budget 2026 Must Focus on Creating a Stable Tax Environment to Drive Growth
The Income-tax Act of 2025 is set to revolutionize India’s direct tax landscape, replacing the outdated Income-tax Act of 1961. This new legislation aims to simplify tax regulations, reduce litigation, and enhance compliance in a digital-first environment. As the country prepares for the transition, experts emphasize the need for clear guidelines to ensure a smooth shift for taxpayers and to bolster economic growth.
Transforming the Tax Framework
The Income-tax Act of 2025 introduces a comprehensive overhaul of India’s direct tax system, which has remained largely unchanged for over six decades. This new framework is designed to streamline tax provisions, eliminate redundancies, and align tax administration with modern compliance requirements. By retaining the core structure of the existing income tax system, the new law aims to provide clarity and certainty for taxpayers. Sameer Gupta, National Tax Leader at EY India, highlighted the importance of detailed guidelines and FAQs to minimize confusion during this transition. He noted that such measures are crucial to avoid potential litigation and ensure that taxpayers can navigate the new system effectively.
Key Reforms for Economic Growth
EY India has proposed several direct tax reforms that could significantly impact private capital investment and overall economic competitiveness. One of the primary goals is to establish a stable tax environment by minimizing frequent changes in tax rates. A predictable tax policy is essential for building trust among taxpayers and improving compliance, which in turn enhances revenue collection. Additionally, the rationalization of Tax Deducted at Source (TDS) provisions is necessary to reduce disputes and cash flow blockages faced by industries. The Budget 2026 is expected to outline a roadmap for simplifying the TDS rate structure, potentially limiting it to three or four rates to ease compliance burdens.
Incentives for Manufacturing and Employment
To stimulate growth in the manufacturing sector, the government is urged to consider reintroducing accelerated depreciation as a targeted fiscal incentive. This measure would be integrated into the existing concessional corporate tax regime, ensuring that it does not trigger Minimum Alternate Tax (MAT) for companies. Such a move is particularly relevant as India aims to position itself as a global manufacturing hub under initiatives like ‘Make in India.’ Furthermore, to encourage job creation, the salary cap for new employees eligible for tax deductions should be increased from Rs. 25,000 to Rs. 1 lakh. This adjustment would better reflect current salary trends, especially in emerging sectors such as artificial intelligence and robotics.
Enhancing Tax Certainty for Foreign Investors
On the indirect tax front, simplifying the customs tariff framework is essential to reduce compliance burdens on importers. This includes rationalizing customs duties sector-wise and aligning tariff rates with global standards to maintain the competitiveness of Indian goods in international markets. Additionally, extending the validity of advance rulings for customs from three to five years could enhance tax certainty and mitigate disputes. Gupta emphasized that providing tax certainty to foreign investors is critical, as the lack of specific rules has led to recurring litigation. Clear codification of tax rights and an optional presumptive regime for foreign entities in specific sectors could further enhance the investment climate in India.
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