Union Budget 2026: Pre-Budget Expectations on Income Tax Reforms

As India prepares for Union Budget 2026, expectations around income tax reforms are centred on improving certainty, reducing litigation, and aligning tax policy with India’s growing role as a global hub for services, technology, and capital.

With the expansion of Global Capability Centres (GCCs), data centres, and cross-border operations, targeted income tax reforms can significantly enhance ease of doing business while ensuring stable tax collections.

The following proposals reflect key income tax expectations from Budget 2026.

---

Tax Certainty for Presence of Employees of Foreign Entities in India

In a globalised economy, short-term and project-linked travel of employees to India is inevitable. This is particularly relevant given India’s emergence as a preferred destination for Global Capability Centres (GCCs), where senior executives frequently travel to India to set up or scale operations.

However, uncertainty around potential tax exposure and compliance obligations acts as a friction point. In the context of evolving visa regimes globally, there is an opportunity for India to position itself as a more attractive destination for expatriates and global leadership talent.

A key expectation from Budget 2026 is:

• Expanding the deemed income regime under section 44BBD, currently available to the electronic manufacturing sector, to cover any category of non-resident providing services in India, irrespective of industry.

This would:

• Facilitate predictable tax collections
• Avoid protracted litigation on attribution and permanent establishment issues
• Reduce compliance burden for both taxpayers and tax authorities

---

Tax Neutrality for Fast-Track Demergers

Fast-track demergers were introduced to enable quicker corporate restructuring without requiring court or tribunal intervention. However, the absence of tax neutrality has significantly diluted their effectiveness.

Industry expects Budget 2026 to:

• Extend tax neutrality benefits to fast-track demergers, similar to regular demergers
• Rely on existing safeguards such as General Anti-Avoidance Rules (GAAR) to address tax avoidance concerns, rather than denying neutrality altogether

Without tax neutrality, companies are compelled to use the longer National Company Law Tribunal (NCLT) route, defeating the purpose of fast-track mechanisms and increasing transaction costs.

---

Clarity on Data Centres Not Constituting a Permanent Establishment

Data centres involve substantial, long-term capital investment, and multinational digital players seek certainty before committing such resources.

To reduce permanent establishment (PE) disputes, Budget 2026 could:

• Introduce specific safe harbour rules for data centres
• Prescribe an operating profit margin on a cost-plus basis, aligned with the arm’s length principle

Once Indian data centre operations are fully remunerated at arm’s length, any further profit attribution to a PE should be unnecessary. This would:

• Render PE disputes infructuous
• Provide tax certainty to non-resident enterprises
• Encourage large-scale investment in India’s digital infrastructure

---

Keeping Assessments in Abeyance Pending Advance Pricing Agreements (APAs)

Advance Pricing Agreements (APAs) often take 4–6 years to conclude, during which assessment proceedings continue, leading to avoidable litigation.

Industry expects Budget 2026 to provide that:

• Assessment proceedings for years covered under an APA application are kept in abeyance, similar to the advance ruling regime
• Final assessments are framed only after the APA is concluded, in line with agreed terms

This would prevent interim disputes that are ultimately reversed and significantly reduce litigation and administrative inefficiency.

---

Streamlining Tax Provisions for Buy-Back of Shares

The current taxation framework for buy-back of shares is viewed as inconsistent with other capital restructuring mechanisms.

Budget 2026 could rationalise buy-back taxation by:

• Treating buy-back proceeds as dividends only to the extent of accumulated profits
• Taxing the balance portion as capital gains, similar to a capital reduction

Such an approach would bring coherence across deemed dividend provisions and improve tax neutrality in corporate capital management decisions.

---

Closing Thoughts: Income Tax Reform Priorities for Budget 2026

Income tax expectations from Union Budget 2026 are pragmatic and execution-focused:

• Greater certainty for cross-border employment and services
• Faster and more efficient corporate restructuring
• Reduced PE and transfer pricing disputes
• Rationalisation of capital-related tax provisions

Together, these reforms can materially enhance India’s ease of doing business, attract global investment, and reduce litigation—while maintaining a stable and predictable tax base.