Introduction
Union Budget 2026-27 shows an early expression of government tax philosophy. Instead of large-scale tax cuts or temporary tax relief measures, the focus of this budget is on simplification, compliance ease, and efficiency. It is forward looking and focuses on economic incentives designed to support specific economic objectives. The emphasis is on reducing friction in the tax system and improving predictability for businesses and individuals.
With a projected fiscal deficit of 4.3% of GDP and estimated net tax receipts of ₹28.7 lakh crore (indicating 11% projected growth), the fiscal position appears stable. This has allowed the government to direct more attention to structural reforms rather than more aggressive revenue mobilisation measures. The wider takeaway is that tax policy is more and more being viewed as a strategic lever to manage the economy, rather than simply a means to generate revenue.
Replacement of the Income Tax Act, 1961: A Structural Reform
Among the big announcements in the Budget is the Income Tax Act 2025, which will replace the Income Tax Act, 1961 and will come into effect from 1 April 2066.
This is a major direct tax structural reform. The new law is designed to discard obsolete provisions, remove unnecessary exemptions, and exhibit legislative economy. An important aim is to create a more simplified compliance and reporting environment, and a more digitally compliant environment through the streamlining of processes and the automation of reporting.
Planning will be needed because of the extent of the changes.
Businesses will need to update ERP systems, remap existing provisions to the new structure, and reassess earlier tax positions. Judicial precedents and past interpretations may not automatically apply under the new Act, making it important for companies to conduct a detailed impact analysis during the transition year.
This legislative overhaul signals a long-term effort to modernise India’s tax architecture.
Direct Tax Reforms
Share Buybacks Taxed as Capital Gains
A major change introduced in the Budget relates to the taxation of share buybacks. Buybacks will no longer be treated as dividends. Instead, they will now be taxed as capital gains in the hands of shareholders.
The effective tax rates are structured as follows:
- 22% for corporate promoters
- 30% for non-corporate promoters
- 5% (plus surcharge) for non-promoters under long-term capital gains
This reform removes the earlier arbitrage between dividends and buybacks. As a result, companies may need to reassess their capital distribution strategies. Private equity exits, dividend planning, and ESOP liquidity structures may require reconsideration. The overall objective is to promote neutrality and transparency in profit distribution.
Minimum Alternate Tax (MAT) Restructured
Because of this change, businesses with large accumulated MAT credits, especially those that rely heavily on either capital or debt MAT credits, may be impacted the most.
While the reforms provide certainty by stating the rate will be reduced, there also is a loss of flexibility when it comes to the use of credits. Companies will be required to revisit deferred tax assets and determine the ramifications on the financial statements.
Targeted Incentives for Certain Sectors
Tax Holiday for Data Centres
To help position India as a digital infrastructure hub, the Budget grants a tax holiday for foreign firms offering global cloud services via Indian data centres until 2047. The services must involve an Indian reseller entity to end Indian customers. This initiative promotes the development of digital infrastructure while addressing the need for domestic structuring.
Exemption for Toll Manufacturing for 5 Years
Foreign suppliers of capital goods and tooling will enjoy a five-year income tax exemption. This is in support of the electronics and semiconductor ecosystem and is in alignment with the supply chain diversification strategies, including the “China+1” strategy. This is more of a targeted approach to support sectors, as opposed to blanket tax incentives.
Transfer Pricing: Expanding Safe Harbour Provisions
In an effort to minimize disputes and add certainty, the Budget has extended safe harbours
Key changes include:
- Introduction of a unified “Information Technology Services” category
- Standardised margin of 15.5% on cost
- Increased eligibility threshold of ₹2,000 crore
- Five-year continuity of approved safe harbour status
- Greater automation in approval processes
These measures are expected to reduce compliance disputes, particularly for multinational enterprises operating in the IT sectors.
Indirect Tax: Calibrated and Targeted Adjustments
The indirect tax changes are measured and sector-specific.
- Customs duty has been reduced to nil on Li-ion capital goods and solar glass inputs, supporting renewable energy and EV manufacturing.
- The seafood duty-free input limit has been set at 3%, and Basic Customs Duty on frozen fish paste has been reduced to 5%.
- Duty on personal-use imports has been reduced from 20% to 10%.
These adjustments aim to promote cost efficiency in priority sectors while maintaining overall tariff stability.
GST Rationalisation and Liquidity Support
GST reforms focus on easing compliance and improving working capital flow.
- Post-sale discounts can now be adjusted through credit notes without pre-agreement requirements.
- Inverted duty refunds will allow 90% provisional disbursement upfront.
- The ₹1,000 threshold for export refunds has been removed.
These measures are particularly beneficial for MSME exporters and industries with tight liquidity cycles, as they reduce procedural hurdles and improve cash flow management.
Securities Transaction Tax (STT) Recalibrated
The Budget revises STT rates to address speculative activity:
- Futures: 0.05% (150% increase)
- Options premium: 0.15%
The recalibration appears aimed at moderating high-frequency and speculative trading while maintaining overall market stability.
Individual Taxation and Administrative Relief
Personal income tax rates remain unchanged. The rebate of ₹60,000 continues, effectively making income up to ₹12 lakh tax-free under the applicable regime.
Administrative reforms include:
- Automated issuance of lower or Nil TDS certificates
- Increased TDS thresholds across various provisions
- Full exemption of interest received under MACT awards
Although there is limited rate-based relief, compliance simplification significantly improves taxpayer experience
Conclusion
The Union Budget 2026-27 is a budget based on evidence and it presents a structural and reasoned approach to changes in the tax system. Without adopting an ethos of radical change, approaches tax reform with a solid focus on tax policy clarity, broad based predictability, and incorporated targeted tax incentives that promote India’s economic growth and sustainability. In rationally remaking tax legislation of yesteryear, reforming tax on buy backs, reforming Minimum Alternate Tax (MAT), revising and expanding safe harbours in transfer pricing, refinements to the administration of the Goods and Services Tax (GST), and reorganizing customs duties, the government seeks to reduce the tax system friction and improve the predictability in the system.
The reform has a clear purpose; explain reform to both legislators and taxpayers. On the debt side of the budget, the purpose is clear; predictability and minimum friction. On the equity side of the budget, the purpose is to stimulate targeted expenditures, based on the rationales explained in the legislation.
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About Author: Akriti Sharma is associated with KING STUBB & KASIVA, Advocates & Attorneys, where she specializes in taxation law with a primary focus on indirect taxes, handling both litigation and advisory matters. She advises on complex tax issues and represents clients before Appellate Authorities, Tribunals, various High Courts, and the Supreme Court of India. In addition to her tax practice, she is involved in corporate and commercial disputes, offering strategic guidance across sectors. She holds an LL.M. in Taxation Law and is committed to delivering practical, effective solutions within complex tax and regulatory frameworks.
