With the Union Budget for 2026–27 scheduled to be presented on February 1, 2026, attention is firmly on how fiscal policy will support economic growth while reinforcing macroeconomic stability.
To catalyse private investment, the budget is likely to expand the existing production-linked incentive (PLI) scheme to emerging technology-driven sectors such as artificial intelligence, space technology and robotics.
In parallel, higher public investment in futuristic infrastructure linked to AI, GenAI, robotics and space may help crowd in private capital and accelerate the development of these sectors.
Targeted incentives for sunrise industries could play a critical role in fostering innovation, enhancing domestic manufacturing capabilities and attracting foreign investment. The budget is also expected to build on structural reforms undertaken in recent years by balancing growth imperatives with simplification and fiscal consolidation.
From a tax policy perspective, several priority areas are likely to be addressed.
Transition for IT Act
As the shift to the Income-tax Act 2025 approaches, the government may introduce detailed grandfathering provisions to protect positions taken under the current law.
Issuance of guidance notes or frequently asked questions could help clarify the treatment of existing incentives and the continued relevance of judicial precedents, thereby reducing the risk of interpretational disputes and litigation during the transition phase.
Esop taxation
The deferment mechanism introduced in 2020 for Esop perquisite taxation currently applies only to “eligible start-ups”. It is expected that the government may extend this Esop tax deferral benefit to all DPIIT‑registered start-ups, offering greater support to the start-up ecosystem.
Clarity on perquisites
Greater clarity is expected on the taxation of employer contributions exceeding ₹7.5 lakh to specified funds, along with the taxation of accretions thereon.
Specific guidance may be provided on identifying the relevant fund, interpreting the meaning of accretions in the context of superannuation funds and the National Pension System, and determining an appropriate computation methodology.
TDS, TCS provisions
India’s withholding tax framework comprises numerous sections with varying rates and thresholds, leading to complexity and compliance challenges. Building on measures introduced in recent budgets, the government may further rationalise and consolidate TDS and TCS provisions to simplify compliance and reduce classification disputes.
Measures for MSMEs
Existing tax provisions intended to promote timely payments to MSMEs have turned counterproductive for them since larger companies in the private sector prefer to make purchases from non-MSE units to avoid disallowance u/s 43B.
Moreover, adequate penal provisions already exist in the MSMED Act for non-payment/delayed payments to registered MSME units. Hence, an amendment in section 43B of the current Income Tax Act may be considered by rolling back the requirement for deduction of specified expenditures on an actual payment basis to MSMEs.
Minor tax offences
Currently, in 25 of 35 offences (~71 per cent) under the current Income Tax Act mandatory minimum imprisonment has been prescribed. Even minor defaults like failure to deposit TDS timely attract the same punishment. Budget may consider revisiting the existing prosecution provisions with a view to decriminalising minor or technical offences.
Source of funds
While provisions requiring explanation of the source of funds are intended to curb dubious transactions, their broad wording often imposes onerous compliance even for genuine borrowings from regulated entities such as banks and NBFCs. A carve-out for bona fide transactions may be considered.
Ease working capital
The payment of GST liability under the reverse charge method may be allowed to be paid through E-credit ledger. Transfer of the credit balance available in the Electronic Credit Ledger of one GSTIN to another GSTIN under the same PAN may also be considered by the government.
Refund-related reforms
Refund of tax accumulated on account of input services and capital goods may also be considered to address the inversion where input tax rates exceed output tax rates. Provisional refunds for the inverted duty structure might come into effect.
Customs disputes
To reduce litigation, a dispute resolution or settlement mechanism similar to earlier legacy schemes may be introduced under customs law. Additionally, the validity of advance rulings could be extended from three to five years, with a formal renewal mechanism to enhance tax certainty.
Advance rulings
To enhance tax certainty and reduce disputes, the validity of advance rulings might be extended from the current 3 years to at least 5 years. A clear mechanism for renewal of advance rulings might be introduced, enabling businesses to maintain continuity and predictability in their tax positions.
Dinesh Agarwal and Avisekh Jaiswal are tax partners at EY India