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The 2026 Budget has introduced significant changes that will impact various aspects of taxation. Our experts at Lakshmikumaran & Sridharan Attorneys have analysed these announcements and their implications.
Please find below the comment. Do feel free to reach out if you have any immediate questions or would like further insights.
Attributed to Charanya Lakshmikumaran, Executive Partner, Lakshmikumaran & Sridharan Attorneys
Finance Bill 2026 has proposed an amendment to Section 101A of the CGST Act which deals with constitution of National Appellate Authority for Advance Ruling (NAAR). However, the NAAR is yet to be constituted. This amendment allows entrustment of functions of NAAR to any other existing Authority. It is expressly stated that an existing Authority can include "a Tribunal". It will be interesting to see which of the existing indirect tax Tribunals will be entrusted with such functions.
In a welcome move aligning with 56th GST Council's recommendation, the Finance Bill, 2026 proposes omission of Section 13(8)(b) of the IGST Act, allowing intermediary services provides to foreign entities to qualify as 'export of service'. This amendment shifts the place of supply to the recipient's location, thereby removing the ambiguity and GST burden.
Attributed to L. Badri Narayanan, Executive Partner, Lakshmikumaran & Sridharan Attorneys
This is an interesting budget for what it has done and what it has not. It is really a 'clean up' budget to set the stage for more transformative budgets in the future. A few interesting observations. IT Sector and Electronics Manufacturing are clear beneficiaries of this Budget. We have heard the FM on safe harbour for IT and promoting unilateral APAs. From Electronic Manufacturing perspective, two topics that we have been representing to the Ministry have been accepted - one of them being 2% safe harbour for goods belonging to NR when stored in India and exemption to NR for supply of Capital Goods for Tolling in Bonded Zones. The industry has been seeking certainty in these areas and LKS had made representations on their behalf. Glad to see that some of the suggestions have been accepted and have seen the light of the day. The proposed changes will provide impetus to the sector.
The 'quieter' aspects of a budget are rarely appreciated - reducing litigation, decriminalisation of offences, reduction in pre-deposits for stay, extensions of timelines, etc. In my experience, these tend to have larger impact in the overall scheme of things rather than tax breaks and incentives. Overall, I think it is a good budget and something to look forward to in the future years.
Attributed to S. Sriram, Executive Partner, Lakshmikumaran & Sridharan Attorneys
Ending Disputes on time limits to pass assessment orders where matters are referred to Dispute Resolution Panel
The Budget 2026 has moved to legislatively settle the controversy over time limits for issuance of final assessment orders where the matters have been referred to the Dispute Resolution Panel. In the rulings like Roca Bathroom Products Pvt. Ltd., courts held that the overall limitation under Section 153 still controls—even for DRP cases under Section 144C (i.e., final orders could be time-barred if they spill beyond Section 153).
To address this, the Bill proposes inserting new sub-sections 144C(4A)/(4B) and 144C(13A)/(13B) and also inserting Section 153(10) and Section 153B(1A), to clarify that if the draft assessment order under 144C(1) is issued within the Section 153 / 153B time-limit, then the remaining steps and the final order timing are governed by Section 144C's own timelines (acceptance route and DRP-direction route), notwithstanding Section 153/153B. It also makes these clarifications retrospective (from 1 April 2009 for the 153-linked provisions and 1 Oct 2009 for the 153B/search-linked provisions), explicitly noting that differing judicial interpretations and even a split apex court view created uncertainty that this amendment aims to remove.
Updates on ICDS and Ind AS.
The Budget proposes to eliminate the dual-book compliance created by Income Computation and Disclosure Standards (ICDS) vis-à-vis Indian Accounting Standards (Ind AS). A Joint Committee of the Ministry of Corporate Affairs and the Central Board of Direct Taxes is proposed to be constituted to embed ICDS requirements into Ind AS itself. Once implemented, a separate tax accounting requirement based on ICDS is proposed to be discontinued from tax year 2027-28. This should reduce year-end reconciliations, disputes on timing differences, and the compliance cost of maintaining parallel computations for tax purposes, while retaining the underlying tax-policy outcomes within the accounting framework.
Measures to curtail ongoing litigation on procedural defaults
India migration towards a faceless assessment scheme started in 2020, aimed as reducing personal interaction between the tax payer and the revenue authorities. Certain lacuna in the drafting of the scheme resulted in the due process of assessment not being followed by the Revenue Authorities. While the Faceless Assessment Scheme required the notice for initiation of a re-assessment to be issued by an Officer in the Faceless Assessment Unit (FAO), due to the manner in which the electronic issuance of notice system was programmed, the notices came to be issued by the Jurisdictional Assessing Officer (JAO). Thousands of petitions challenging the notices are pending before the Supreme Court and various High Court.
The Union Budget 2026 proposes a retrospective amendment to put an end to the "JAO vs FAO" fight. It is sought to be clarified that, for reassessment initiation and the pre-notice procedure (sections 148 and 148A), the "Assessing Officer" would include (and is deemed to have always meant) an AO other than FAO – meaning thereby that a notice can also be issued by the JAO. The memorandum explaining the amendments expressly states that this is to end divergent High Court views and reduce litigation. Whether this would end the litigation completely has to be seen, given the various other procedural requirements under law, including appropriate approval, existence of assets, etc.
Personal Taxation
The Union Budget has not proposed any direct changes to taxation of individual but has advanced certain indirect benefits. It has been proposed to extend the time available to revise returns up to 31 March (from 31 December) with payment of a nominal fee, alongside a staggered return-filing timeline of 31st July for salaried person (and other non-business individuals), 31st August for bon audit business cases, and 30th September for audit cases.
The burden of non-resident individuals who are selling their immovable property located in India is eased, by shifting the tax payment and compliance liability to a resident buyer. This would enable NRIs to sell their properties in India, without going through the trouble of obtaining TAN, filing TDS return, etc.
Separately, certain taxpayers (students, employees of technology companies, re-located NRI, etc.) who had not disclosed their foreign assets or income have been provided with an additional window for disclosure. Though this would have additional tax liability, it would provide immunity from penalty and prosecution.
Minimum Alternate Tax amendments
The Budget proposes a structural reset of Minimum Alternate Tax (MAT) regime, to facilitate migration to the new corporate tax regime. An exemption from MAT is proposed for non-residents taxed on a presumptive basis. But MAT in the old regime is proposed to become a final tax, with the MAT rate reduced from 15% to 14%. This is a clear deviation from the fundamental concept of MAT being an alternate tax, and a deferred mechanism for collecting tax in advance. No fresh MAT credit will be allowed to accrue for payments made from 1 April 2026. Brought-forward MAT credit up to 31 March 2026 will continue but set-off is proposed to be permitted only for domestic companies shifting to the new regime, and capped at 25% of the tax liability. For foreign companies, set-off is proposed only to the extent normal tax exceeds MAT.
Tax on buy-backs — capital gains alignment and tighter rules for promoter exits
The taxation of share buy-back payouts has been subject matter of constant Legislative policy changes. From being taxed as dividend, to capital gains, to a buy back tax, to deemed dividend, the numerous changes over the past decade. Currently, proceeds received on buy back is taxed as dividend. The Budget 2026 now proposed to align it with a normal share sale, by treating buy-back proceeds as capital gains for shareholders. To curb the use of buybacks as a tax-arbitrage route for large shareholders, the proposal also introduces an additional income-tax on such capital gains where the shareholder is a "promoter," which effectively takes the tax incidence to around 22% for corporate promoters and 30% for other promoters on buy-back gains. These amendments are proposed to apply to buy backs effected on or after 1st April 2026. This would provide a great relief to small shareholders, who were subject to taxation at maximum marginal rate for transfer of their shareholding in a buy back scheme.
Amendment to TCS
TCS on foreign remittances has often operated as a cash-flow cost, even when the tax collected is available as credit against the final tax liability. The Budget proposes, to be made effective from 01st April, 2026, to reduce TCS on overseas tour programme packages from the current 5% / 20% structure to 2%, without any amount threshold. It also proposes to reduce TCS on remittances for education and for medical purposes under the Liberalised Remittance Scheme from 5% to 2%. The change should ease liquidity pressures for families, and reduce the need to claim refunds through return filing. This will reduce blockage of funds materially.
Safe harbour
India's transfer pricing safe harbour regime (section 92CB read with Rules 10TA–10TG) provides certainty only to specified categories and within prescribed thresholds. For IT/ITeS, the commonly used safe harbour route had a turnover threshold of ₹300 crore, beyond which large service providers had to defend margins through benchmarking, often leading to prolonged TP audits and litigation.
Budget 2026 has proposed (i) a sharp increase in the safe harbour threshold for IT services from ₹300 crore to ₹2,000 crore, (ii) substantially expanding the definition of IT/ITeS Sector, and (ii) shifting approvals to an automated, rule-based system, removing routine officer examination. For the data-centre / cloud ecosystem, the Budget also proposes a 15% cost-based safe harbour for a related entity "co-providing data services from India", alongside a policy push to make India a global data hub.
This materially improves certainty for large Indian IT exporters and GCC-linked service models, reduces TP dispute inventory, and makes India a more competitive jurisdiction for scaling tech delivery with predictable tax outcomes. Though a larger ambit would be of greater assistance, it is a welcome step towards reducing unwarranted litigation, and transaction delays.
Pre-deposit of taxes when appeals are pending
The Budget proposes a meaningful reduction in the upfront cash outgo at the outset for taxpayers who contest a demand. At present, taxpayers typically pay 20% of the disputed tax to obtain a stay during the first appeal stage. There is also a dispute over whether the 20% of the pre deposit would be on the basic tax amount, or the total demand including tax and interest.
In the budget 2026, it is proposed to halve this pre-payment requirement in case of appeal being pending before the first appellate authority, to 10%, and to compute it only on the "core tax demand". This should improve liquidity, lower the cost of contest, and make appellate remedies more accessible. It should also discourage premature coercive recovery where issues are arguable and support the stated objective of reducing litigation. This amendment, being beneficial, may apply to pending litigation also.
Attributed to Paritosh Chauhan, Partner, Lakshmikumaran & Sridharan Attorneys
1. On ISM 2.0
ISM 2.0 is explicitly framed to move beyond fabs into:
- semiconductor equipment and materials,
- full‑stack Indian IP/design, and
- supply‑chain resilience.
This (new) ecosystem (when it comes into play) will be supported by industry‑led research/training centres. This means that the upstream stack, i.e., tools, chemicals, IPR and any other materials used in manufacture are all now in scope of ISM 2.0.
This means that to secure benefits, companies will have to move up the value chain and procure equipment, materials and design from Indian tool vendors, material suppliers, and design partners. Each of these relationships will need:
- procurement terms which carefully account for risk allocation (both commercial and regulatory) in view of the fact that the intermediate components are now being procured from Indian vendors (as against import reliance). For example, the risk under consumer protection laws needs to be addressed to attribute/apportion liability correctly.
- technical standards will need to be specific and annexed to the contracts. Compliance with QCOs and other local regulatory requirements should be in addition to the commercially agreed technical needs standards and should also be adequately addressed.
- licensing terms (in JVs or tech licenses) will need to be carefully defined, to ensure clear limits on use as well as careful segregation of background and foreground IPR. This aspect is often overlooked but is now of paramount importance considering any breach (including third-party breach, which can often exceed contract value), as well as enforcement action will be in India. "Full‑stack Indian IP" and "industry‑led R&D" means process recipes, designs, and software flows will be funded and co‑developed in India. Without adequate provisions for IP‑assignment/licensing, there is a risk of fragmented ownership between the sponsor, the tool vendor, the materials supplier, and the design partner – all of which are difficult to monetise or defend."
From a contracts and compliance perspective, ISM 2.0 isn't factory‑only policy. It shifts attention to the licensing and standards that apply to upstream equipment and materials, and it makes technology and IP terms central to every supplier engagement. Companies should ensure IP assignment and background‑IP licensing terms are carefully negotiated and closed at bid-stage."
2. On increased outlay of INR 40,000 crore for Electronics Components Manufacturing Scheme (ECMS).
Similar to the impact of ISM 2.0, if more electronic components are sourced locally to capture incentives (or simply because local capacity now exists and it is cheaper), companies will contract with a larger set of domestic component vendors. This means increased quality, warranty, and liability exposure for OEMs and system integrators, often disproportionate to individual component or contract values. Onboarding vendors responsibly requires (as a minimum):
- documented vendor qualification (technical capability, reliability, compliance),
- conformance testing, and
- ongoing audits
- milestone based checks and payment terms which are subject to these checks.
A generic template will not work - better framework agreements and procurement contracts with careful risk allocation will be required."
3. On CDSCO reforms:
A strengthened CDSCO is likely to result in:
- improved approval timelines through a dedicated scientific review cadre and specialist expert;
- better guidance on dossiers (i.e., the structured set of documents that a sponsor / applicant submits to a regulator to demonstrate that a drug product is quality-assured, safe, and effective for its proposed use).
This will help in-house regulatory teams plan for authorisations with more predictability.
Budget 2026 proposes to strengthen the CDSCO through a dedicated scientific review cadre and specialist expertise, with the stated objective of aligning approval timelines with global standards. While no statutory timelines have been introduced, this is expected to improve review quality, consistency, and the clarity of regulatory expectations, including around dossier requirements. In turn, this should enhance predictability for in‑house regulatory teams in planning product authorisations, subject to effective implementation
4. On rare earth corridors:
Dedicated rare earth corridors have been announced for Odisha, Kerala, Andhra Pradesh, and Tamil Nadu. These announcements constitute policy intent only and do not, by themselves, create statutory rights, concessions, or enforceable obligations. Implementation will require subsequent legislative, regulatory, or executive action. Notwithstanding the absence of immediate legal effect, bidders may reasonably expect future auctions and concession documents to be updated to reflect corridor‑linked policy measures once formally notified.
5. On review of FEMA/NDI Rules:
It was announced that a comprehensive review of the Foreign Exchange Management (Non‑debt Instruments) Rules will be undertaken to create a more contemporary, user‑friendly framework for foreign investments. This signals an intent to rationalise and modernise the delegated regulatory framework governing FDI. The emphasis on user‑friendliness, reduced compliance, and deregulation suggests a likely focus on simplification, procedural efficiency, and clarity, subject to implementation through subsequent notifications.
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