Overview of Union Budget 2026: Impact & Opportunities for India’s MSME Sector

A Growth-Oriented Budget for a ‘Viksit Bharat’

The Union Budget 2026 has been presented in the midst of global economic uncertainty due to tariffs, changing global economic alliances and heightened need for self-reliance. The Budget has reiterated the government’s commitment to roll out the new Income Tax Act 2025 with effect from 1 April 2026 (financial year 2026-27) which will replace the Income-tax Act, 1961 earmarking the beginning of a new tax era. The draft Rules and Forms are expected to be notified shortly. This will now result in a relatively simpler codified income-tax law due to removal of obsolete provisions, rationalization of tax deduction provisions, continuation of the substantiative tax framework, removal on certain inconsistencies and other reforms.

The Budget has a clear focus on entrepreneurship and innovation and has made key announcements for India’s Micro, Small, and Medium Enterprises (MSMEs).

Reforming the Business Environment: Tax and Compliance Simplification

A central pillar of the budget’s ecosystem approach is improving the ‘Ease of Doing Business’ through fundamental reforms. For MSMEs, which are often disproportionately affected by regulatory burdens, these changes to the tax and compliance framework are as critical as direct financial support, freeing up resources for growth and innovation.

Direct Tax Proposals under the New Income Tax Act, 2025

The introduction of the new Income Tax Act, 2025, brings several reforms designed to simplify processes and reduce the compliance burden on small businesses.

• Simplified Rules and Forms: A core objective of the new Act is to redesign tax forms so that ordinary citizens and small business owners can comply with their obligations without significant difficulty, reducing reliance on expensive professional services for routine filings.
• Integration of Assessment & Penalty Proceedings: The proposal to issue a common order for both tax assessment and any resulting penalty will streamline the dispute resolution process. By reducing the multiplicity of proceedings, this measure will save MSMEs valuable time and resources. However, this may also result in higher incidence of levy of penalties which at present is deferred until the disputed issues are decided by the first appellate authorities in mot cases.
• Reduction in upfront tax payment in case of Appeals: At present, the tax authorities generally require a deposit of 20% of the tax amount in case appeals . This is proposed to be reduced to 10% of the tax amount.
• Rationalization of Penalties: The budget significantly reduces the uncertainty associated with tax compliance. The conversion of certain penalties for technical defaults into fixed fees and the decriminalization of minor offenses will create a more trust-based and less adversarial tax environment for small business owners.
• Updated Returns Post-Reassessment: The facility to update tax returns even after reassessment proceedings have begun is a key step towards reducing litigation. It provides businesses an opportunity to voluntarily comply and correct errors, thereby avoiding protracted legal disputes.

Indirect Direct Tax Proposals and Trade Facilitation

The budget introduces key proposals to ease indirect tax compliance and facilitate trade, directly benefiting MSMEs engaged in domestic and international commerce.

Unlocking Global Markets for E-commerce

• In a landmark reform, the budget announces the complete removal of the current value cap of Rs.10,00,000 per consignment on courier exports. This single change dismantles a major barrier to scale for countless small businesses, artisans, and direct-to-consumer start-ups that rely on e-commerce platforms to access global markets. By eliminating this cap, the government is enabling micro-entrepreneurs to fulfill larger international orders seamlessly, fostering a new wave of ‘Made in India’ exports driven by the digital economy.
• SEZ Reforms: A special one-time measure will allow eligible manufacturing units in Special Economic Zones (SEZs) to sell to the Domestic Tariff Area (DTA) at concessional duty rates. This provides a crucial buffer for MSMEs in SEZs that may be facing global trade disruptions, allowing them to tap into the domestic market more effectively.
• Customs Process Simplification: The collective impact of moving towards trust-based systems, creating a single digital window for approvals, and enabling self-declarations for customs warehousing will be transformative. For MSME importers and exporters, these reforms promise to significantly reduce transaction delays and lower compliance costs. These targeted reforms complete the strategic triad of capital, markets, and ease of doing business, positioning the MSME sector for a new growth trajectory.

The Budget creates four clear pathways for MSME growth:

1. De-risking Growth Capital: A dual-fund strategy fuels both high-potential scale-ups through targeted equity and grassroots entrepreneurship through continued access to risk capital.

2. Systemic Resolution of Cash Flow Delays: Comprehensive enhancements to the TReDS platform offer a structural solution to the endemic problem of delayed payments, unlocking critical working capital.

3. Reduced Compliance and Litigation Burden: Tax simplification and penalty rationalization under the new Income Tax Act will allow MSMEs to redirect resources from administrative tasks to core business activities like innovation and expansion.

4. Integration into National Growth Sectors: Large-scale public investment in manufacturing, infrastructure, and rural value chains opens unprecedented demand channels, embedding MSMEs as indispensable partners in the nation’s growth.

The government is attempting to improve the MSME ecosystem by attempting to solve problems of delayed payments and complex compliance while simultaneously building new pathways to growth through supply chain integration and global e-commerce.