As the Union Budget 2026 approaches, the corporate sector is closely tracking policy signals that could further strengthen India’s growth momentum, enhance global competitiveness, and provide certainty in an increasingly complex economic environment. In the backdrop of persistent global trade and tariff uncertainties, shifting geopolitical alignments, and realignments in global supply chains, businesses are navigating heightened cost pressures and volatility in cross-border trade. The conclusion of discussion of the India EU Free Trade Agreement is a welcome measure as it one of the largest such deal to be entered into.
Against this backdrop, businesses are navigating higher cost pressures and increased volatility in cross-border trade. In this environment, there is a growing need for fiscal and tax measures that can cushion the external shocks, improve cost competitiveness, and offer a stable and predictable framework for long-term business planning.
Some of the significant expectations pertaining to corporate tax:
1. Extension of Lower Tax Rate of 15% for New Manufacturing Domestic Companies under Section 115BAB [corresponding section 201(1) of ITA 2025] to be extended to 31 March 2029
As per the provisions of Section 115BAB [corresponding to section 201(1) of ITA 2025] of the Income-tax Act, 1961 (hereinafter referred to as ‘the IT Act), new domestic manufacturing companies engaged in the business of manufacture or production of any article or thing and research in relation to, or distribution of, such article or thing manufactured or produced by them and incorporated on or after 1 October 2019, have an option to pay tax at a lower effective rate of 17.16% (i.e. (15% basic tax plus 10% surcharge) plus 4% cess) subject to fulfillment of specified conditions.
Companies opting for this section would not be required to pay Minimum Alternate Tax (MAT), but are not eligible to claim the majority of the deductions available to other business assessees. One of the conditions prescribed under this section is that the companies must commence their production on or before 31 March 2024. India is emerging as the preferred manufacturing destination as most global companies are looking at broad basing their manufacturing locations in view of the geo-political developments. In recent times, several global companies in electronics, auto and engineering sectors have announced mega investment plans for India for manufacturing projects. Most manufacturing projects have long gestation periods ranging from 2 year to 3 years.
Therefore, it is widely expected that the sunset date for commencing manufacturing activity would be extended to 31 March 2029 so as to boost the new manufacturing companies.
2. Tax on Dividends Distributed by Domestic Companies to be restricted to 20%
Under the existing provisions of the IT Act, there is a double taxation of income in case of companies i.e. firstly the companies are required to pay corporate tax, and then the shareholders pay tax on the dividends. In case of resident individual shareholders, the tax on dividends can be as high as 35.88%. On the other hand, non-residents are liable to tax on dividends @ 20% (plus surcharge and cess) which may further be lowered by Double Tax Avoidance Agreements to 5%-15%.
In order to reduce the cascading effect of double taxation, it is expected that the maximum tax on dividends distributed by domestic companies in case of resident shareholders is limited to 20% (plus surcharge and cess).
3. Reduction in Tax Rate for Partnership Firms and LLPs
Small and medium enterprises generally prefer partnership firms or LLPs as compared to companies due to ease of formation, reduced statutory obligations, fewer compliances, etc. However, the taxation structure is higher in case of partnership firms and LLPs as compared to corporates, where the rates of tax generally range from 17.16% to 25.17% (including the applicable surcharge and cess) under the new optional corporate tax regime and new manufacturing companies tax regime.
Partnership firms and LLPs are taxed at a flat rate of 30% (plus surcharge and cess), which may effectively result in a rate as high as 34.944%. At the same time, there is no tax on the distribution of profits in case of partnership firms and LLPs, whereas in the case of companies, dividends are taxed in the hands of the shareholders. There is a need to reduce the disparity with the corporates and to incentivize the small and medium sized businesses. Thus, it is expected that the tax rate for firms and LLPs would be reduced to 25% (plus surcharge and cess).
Alternatively, it is proposed that a special optional tax regime be introduced under which firms and LLPs may choose to be taxed at a concessional rate of 22% (plus applicable surcharge at 10% and health and education cess at 4%) on total taxable income computed without claiming specified deductions and exemptions. To complement this regime, simplified return forms may be prescribed for firms, LLPs, companies, and co-operative societies opting for such concessional taxation, with a view to reducing compliance burden and improving ease of doing business.
4. 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 [corresponding section 393 (For Payments to Resident table) – (6)(i) of ITA 2025] – applicable for contracts – imposes a TDS rate @ 1% or 2% depending upon the nature of tax deductee, whereas 194H [corresponding section 393 (For Payments to Resident table)(1)(ii) of ITA 2025] – applicable for commissions imposes a TDS rate of 2%. However, the TDS rates in certain other sections (Section 194J [corresponding section 393 (For Payments to resident table(6)(iii) of ITA 2025] – applicable for Professional Services) is 10%.
High TDS at the rate of 10% effectively blocks working capital, especially for early-stage start-ups and MSMEs that typically operate on thin margins and rely heavily on internal accruals for day-to-day operations. While such taxes are creditable at the time of filing returns, the time lag in refunds often results in liquidity stress and avoidable compliance burden, contrary to the government’s stated objective of promoting ease of doing business.
Subjecting small businesses and start-ups to TDS, such as 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.
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