As the Union Budget 2025-26 approaches, the corporate sector is keenly watching for announcements that could drive economic growth, attract investments, and simplify taxation. With businesses navigating an increasingly competitive and dynamic global environment, there is a strong demand for reforms that reduce compliance burdens, enhance clarity in tax laws, and provide fiscal incentives to encourage innovation and expansion.
This year, the spotlight is on the potential introduction of the reforms aimed at revamping India’s direct tax framework expected to simplify corporate tax laws by addressing ambiguities, rationalizing tax rates, and introducing a more streamlined and transparent structure. As corporate India eagerly awaits the budgetary proposals, there is hope that the government will focus on aligning tax policies with the needs of a resilient and forward-looking economy along with incentivising the businesses.
Some of the significant expectations vide Union Budget 2025-26 pertaining to corporate tax landscape in India are listed below:
1. Deduction of expenditure incurred on Corporate Social Responsibility (CSR) required under section 135 of the Companies Act
Under the existing provisions of the Income Tax Act, 1961 (‘IT’ Act’), Explanation 2 to section 37(1) explicitly disallows expenditures incurred by companies on activities relating to corporate social responsibility (CSR) as referred to in section 135 of the Companies Act 2013. The company law regulations impose statutory obligation on certain companies (such as companies having average annual profits of more than Rs. 5 crores) to spend at least 2% of the average net profits of company made during the 3 immediately preceding financial years in India on CSR activities. This provision has gone a long way in improving the socio-economic situation and upliftment of the lower strata of the society and is a statutory obligation. Allowance of CSR expenditure as eligible expenditure u/s 37(1) would incentivises the eligible companies who are legally bound to contribute.
In view of the above, there is an expectation that CSR expenses should be allowed as tax deduction and for this purpose, omit Explanation 2 to section 37(1) of the IT Act.\
2. Extension of sunset provision in respect of specified business u/s 80-IAC
As per the provision of section 80-IAC of the IT Act, an Undertaking being an eligible start-up which is engaged in the business of innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation can claim deduction of an amount equal to 100% of the profits and gains derived from such business for 3 consecutive assessment years out of first 10 years.
Further the section specifically defines the term “eligible start-up” as a company or LLP which cumulatively fulfils the following:
(i) The total turnover of the business should not exceed Rs. 1 billion in the financial year in which deduction is claimed.
(ii) It holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government.
(iii) It must be incorporated between 1 April 2016 to 31 March 2025.
India has become home to several startups due to exponential economic growth and business friendly fiscal policies. As a result of the same, the number of recognised start-ups has increased from 452 in 2016 to more than 1,40,803 in 2024.
In order to continue incentivizing and encouraging more entrepreneurs, it can reasonably be expected that the Central Government may propose to extend the sunset date of incorporation from 31st March 2025 to 31st March 2027.
Rationalisation of TDS rates for start-ups, small businesses
Certain sections of the Income Tax Act provide a nominal TDS rate. For instance, Section 194C – applicable for contracts – imposes a TDS rate @ 1% or 2% depending upon the nature of tax deductee, whereas 194H- applicable for commissions -imposes a TDS rate of 2%. However, the TDS rates in certain other sections (Section 194J – applicable for Professional Services) is 10%.
Subjecting small businesses and start-ups to TDS, say 10%, imposes a restriction on their liquidity, which is a vital factor for smooth functioning of their business operations and creates working capital issues.
Thus, it is expected that the TDS rates will be rationalized and reduced from 10% to 5% on professional services under section 194J.
4. Disallowance for delay in payments to Micro or Small Enterprises u/s 43B(h) may be restricted to delays beyond 90 days
The Finance Act, 2023 has amended section 43B of the IT Act with respect to the payment made to micro or small enterprises registered under MSMED Act and sub-clause (h) inserted therein. In accordance with the provision of section 43B(h) of Income Tax, 1961, if an amount payable to micro or small enterprises (registered under MSMED Act) remains outstanding beyond the period (15 days or 45 days, as applicable) specified in section 15 of MSMED Act, by the buyer, such amount is disallowed in the year of delay. However, the buyer can claim deduction in the year in which liability is actually paid under section 43B(h) of the IT Act, 1961.
Based on the current provisions, the entire amount payable to such micro or small enterprises is disallowable if it is not paid within the aforesaid timeline and is allowable in the year of payment. This provision has received mixed response as several large enterprises are reluctant to deal with micro or small enterprises particularly in businesses the credit period is much longer. As such, to achieve a balance, the disallowance may be restricted to those cases where the payments is delayed beyond a period of 90 days. This will also reduce administrative burden for the businesses.
Author Bio
