RPV Legal's Primer On Union Budget 2026–27

I. Introduction

The Union Budget 2026–27 arrives at a critical juncture, with India positioning itself for global economic leadership amid heightened global tensions, shifting trade alignments, and persistent economic uncertainty. In an environment marked by global trade slowdown, volatile energy markets, and changing monetary conditions, the Budget reflects a calibrated policy approach centred on economic stability, growth, and structural reform. It builds on past reforms and reinforces domestic growth drivers without resorting to short-term populist measures.

Presented on 1st February 2026, the Union Budget 2026–27 reaffirms a reform-oriented policy stance, deliberately voiding headline-driven tax changes and populist measures, an approach described by the Finance Minister as "reforms over rhetoric". Instead, it reflects a conscious policy choice towards stability, regulatory clarity and long-term growth, supported by structural reforms and continued capital investment, at a time of global economic slowdown.

The Union Budget 2026–27 assumes particular significance as it follows a phase of substantive structural reforms across labour and taxation regimes, including the rollout of the Labour Codes and the next phase of GST rationalisation. Parallel reforms in customs and trade policy, aimed at tariff rationalisation, trade facilitation, and supply-chain resilience, coupled with a renewed focus on the MSME sector to strengthen domestic manufacturing and enable deeper global integration, forms the backdrop against which the Union Budget 2026–27 must be assessed.

Significantly, the Union Budget 2026–27 also underscores India's transition toward a technology-led and infrastructure-intensive growth model, with targeted investments in digital public infrastructure, data centre parks, health infrastructure expansion, and next-generation logistics networks. Incentives for domestic data centre development, enhanced support for digital services, and the continued rollout of integrated health and medical infrastructure signal a clear push toward data sovereignty, resilient supply chains, and social sector capacity building. Collectively, these measures reflect a strategic shift from incremental reform to ecosystem creation, strengthening India's competitiveness in emerging sectors while reinforcing long-term economic resilience and self-reliance.

II. Indirect Taxes: GST and Beyond

A. 2025 in Review: Rate Reform, Compliance Relief, and Legal Stabilisation

The year 2025 marked a turning point in India' taxation regime, with indirect tax reform gaining visible momentum. Following strong revenue collections and a widening tax base, in late 2025, the GST Council undertook a long-awaited rate rationalisation exercise. The rate structure was streamlined into two primary slabs of 5% (merit) and 18% (standard), supplemented by a 40% retained for luxury and sin goods.¹ This reform represents the most significant recalibration since GST's introduction and reflects a clear policy intent to simplify compliance and reduce classification disputes.

New GST rules were notified to enhance digitisation and ease of compliance. Notably, the CGST (Fourth Amendment) Rules, 2025 mandated Aadhaar-enabled electronic registration and revised turnover thresholds for registration exemptions. In parallel, a GST amnesty scheme was introduced through Section 128A of the CGST Act (effective November 2024), permitting waiver of interest and penalties on outstanding tax demands for the period July 2017 to March 2020, subject to payment of the principal tax amount by 31st March 2025. Further, the official launch of the GST Appellate Tribunal ("GSTAT")² on 24th September 2025 marked a key institutional development, establishing a dedicated second-tier appellate forum aimed at expediting dispute resolution and reducing pendency.

B. Economic Survey Insight: Revenue Buoyancy and the Push for Simplification

The Economic Survey records sustained revenue buoyancy, with collections for December rising to Rs. 1.75 lakh crore.³ Pressures were partially lifted through a limited amnesty scheme and the operationalisation of the GST Appellate Tribunal in September 2025, providing a long-awaited institutional forum for dispute resolution.

Following the comprehensive rate rationalisation in late 2025, GST collections reached record levels^[4] and have remained resilient despite moderation in overall GDP growth. High-frequency data revealed momentum in transactions as cumulative e-way bills were higher and indicators like manufacturing PMI and digital payments showed improvement.⁵ The Survey further highlights that the automated fast-tracking of input tax credit ("ITC") refunds has eased working capital constraints for exporters and mitigated rate-reduction shocks.⁶

The Survey underscores the need for further simplification, noting that a reduced rate structure could enhance volumes and compliance, with growth offsetting revenue impact. It recommends a facilitative e-way bill framework and a "trusted dealer" model, concluding that GST buoyancy is strengthening but requires calibrated policy fine-tuning to sustain compliance and reduce the tax burden.

C. Union Budget 2026–27: Measures and Legislative Amendments

Budget 2026–27 introduces significant proposals with implications for financial markets, indirect tax revenue planning, and trade policy. Among them:

• Increase in Securities Transaction Tax (STT): The government has proposed to increase the STT on futures trading from 0.02% to 0.05%. Additionally, STT on the premium and exercise of options is set to rise to 0.15%, up from 0.1% and 0.125%, respectively. This move is intended to moderate speculative activity while enhancing fiscal receipts.
• GST Revenue Estimates and Structural Adjustments: The government projects gross GST collections at Rs. 10.19 lakh crore for FY26. The outlook for FY27 will depend heavily on the consumption response and compliance efficiencies triggered by the GST rate restructuring undertaken in September 2025. Early trends suggest a stabilisation in collections and greater filing consistency across sectors.
• Tariff Rationalisation and Structural Simplification: Continuing its reform trajectory, the Finance Minister reiterated that Customs and Central Excise proposals are designed to streamline the tariff regime, support domestic production, correct inverted duty structures, and enhance export competitiveness. These principles will likely guide future notifications and legislative fine-tuning under the Customs and Central Excise Acts.

III. Micro, Small and Medium Enterprises (MSMEs)

A. 2025 in Retrospect: Strengthening the MSME

Micro, Small and Medium Enterprises ("MSMEs") continued to anchor India's industrial and employment landscape. In 2025, the sector accounted for approximately 35.4% of manufacturing output, 48.58% of exports, and 31.1% of India's GDP,⁷ With over 7.47 crore enterprises employing more than 32.82 crore persons, it is the second-largest employer after agriculture.⁸

Credit flow to MSMEs emerged as a key driver of industrial lending growth during H1 FY26, significantly outperforming large industries credit on a year-on-year basis.⁹ This momentum was underpinned by targeted policy interventions, most notably the revised MSME classification thresholds notified in April 2025, which widened eligibility for priority sector lending and budget-linked incentives. Further strengthening credit access, the Government doubled the ceiling under the Credit Guarantee Scheme from Rs. 5 crore to Rs. 10 crore, while rationalising annual guarantee fees for cover beyond Rs. 1 crore, effective 1st April 2025.¹⁰ The Self-Reliant India ("SRI") Fund, launched to infuse Rs. 50,000 crore as equity funding in MSMEs, supported 682 enterprises through equity investments aggregating Rs. 15,442 crore.¹¹ Alongside these measures, NBFCs continued to play a pivotal last-mile role, sustaining strong double-digit growth in MSME lending.

B. Economic Survey Signals: Persistent Credit and Payment Stress

Despite expanded credit footprints, the Economic Survey labelled access to timely and affordable credit facility as the biggest obstacle for MSMEs. Operational challenges such as persistent delayed payments remains a critical challenge for the MSME sector, with an estimated Rs. 8.1 lakh crore locked in delayed payments,¹² impacting liquidity, especially for micro-suppliers.

While statutory remedies exist under the MSMED Act, 2006, MSMEs are often reluctant to invoke them as initiating delayed payment proceedings against buyers, strains commercial relationships, leading to withdrawal of future orders. Given their dependence on long-term business associations, MSMEs often prioritise continuity over enforcement, even at the cost of prolonged receivables.

To mitigate these frictions, the Government has continued to expand the Trade Receivables Discounting System ("TReDS") ecosystem and broaden digital invoicing norms by lowering the turnover threshold, thereby improving inclusivity and reducing transaction costs. Further, the MSE Scheme for Online Dispute Resolution ("ODR") for Delayed Payments, supported by the MSME ODR Portal, promotes pre-adjudicatory, dialogue-based settlement, enabling recovery of dues without immediate escalation into formal arbitral proceedings. The scheme offers a fully digital, time and cost effective process, while preserving commercial relationships, an outcome critical to MSME resilience.

C. Budget 2026–27: Creating MSME Champions through Capital and Capability

Building on these foundations, the Budget articulates a three-pronged strategy to transform MSMEs into globally competitive 'champions',¹³ with distinct focus on micro enterprises:

• Equity Support: The Budget proposes the establishment of a Rs. 10,000 crore SME Growth Fund to support high-potential, job-generating enterprises, alongside a Rs. 2,000 crore top up to the SRI Fund, enhancing support for MSMEs by deepening access to risk capital.
• Liquidity Support: With over Rs. 7 lakh crore already channelled to MSMEs, the Budget introduces four structural measures to unlock liquidity at scale¹⁴:
  1. Mandating TReDS as the default settlement platform for all MSME procurements by CPSEs, setting a benchmark for private corporates.
  2. Extending credit guarantee coverage under Credit Guarantee Fund Trust for Micro and Small Enterprises ("CGTMSE") for invoice discounting on the TReDS platform.
  3. Integrating Government e-Marketplace ("GeM") with TReDS to enable faster and cheaper working capital finance.
  4. Enabling securitisation of TReDS receivables as asset-backed securities to develop a secondary market and improve liquidity cycles.
• Professional Support: The Budget introduces 'Corporate Mitras', professional institutions tasked with providing affordable compliance, governance and advisory support, particularly for MSMEs operating in Tier-II and Tier-III cities.

IV. Customs and International Trade

A. Strategic Policy Developments in 2025: Tariff Rationalisation and Facilitation Drives

Notwithstanding prevailing global economic volatility, 2025 marked a consequential year for India's trade and tariff policy. India concluded negotiations and executed several landmark trade agreements, including the India–UAE Bilateral Investment Treaty¹⁵ and the India–UK Comprehensive Economic and Trade Agreement¹⁶, the latter representing India's first major trade pact with a Western economy. As negotiations on multiple free trade agreements continued¹⁷, the Union Budget 2025–26 recalibrated India's tariff architecture to reinforce domestic manufacturing. Customs duties were increased on select finished consumer and luxury imports, while duties on capital goods, inputs, and raw materials were reduced or exempted to lower production costs. Simultaneously, the Budget rationalised the tariff framework by pruning the number of tariff slabs, eliminating seven granular rates, signalling a shift towards a simpler, more predictable customs regime aligned with India's manufacturing and trade integration objectives.¹⁸

B. Survey Takeaways: Aligning Tariffs with Competitiveness and Export Growth

The Economic Survey highlighted the resilience of India's external sector amid persistent global headwinds. Merchandise exports during April–December 2025 registered a year-on-year increase of 2.4%, while services exports recorded a sharper growth of 6.5%, notwithstanding rising trade barriers in select markets.¹⁹ India's export earnings hit a record USD 825.3 billion in FY25. Rising exports and a growing services surplus helped keep the current account deficit modest (~0.8% GDP in H1 FY26).²⁰ On the import side, merchandise imports grew by about 5.9% during the same period, reflecting sustained domestic demand.

The Survey²¹ notes India's external resilience to be anchored in strong services trade, high-value manufacturing exports, and robust foreign exchange reserves. At the same time, it cautions that the global economic order is witnessing increasing strategic fragmentation, with trade and capital flows shaped by geopolitical considerations and industrial policy interventions. Against this backdrop, the Survey emphasises the need for stable capital inflows, particularly foreign direct investment, alongside targeted policy measures to enhance export competitiveness. These include reducing manufacturing and logistics costs, addressing inverted duty structures, and promoting calibrated, productivity-linked import substitution. A competitive, export-oriented trade strategy, the Survey concludes, is central to sustaining external stability, supporting currency resilience, and reinforcing India's integration into global value chains.

C. Budget 2026–27: Measures on Customs and Trade

The Union Budget 2026–27 introduced several targeted customs duty amendments aimed at export promotion, strategic manufacturing, and personal consumption relief:

• Aviation and Defence Manufacturing: Basic customs duty has been exempted on components and parts used in the manufacture of civilian aircraft, including training aircraft. Further, imports of raw materials used in the production of aircraft parts for defence maintenance, repair, and overhaul services have also been exempted. These measures aim to bolster domestic capacity in civil and defence aviation manufacturing.
• Marine and Leather Exports: The permissible duty-free import limit for specified inputs used in seafood processing for export has been increased from 1% to 3% of the previous year's FOB export value. In the leather sector, duty-free input imports, previously available for exporters of leather or synthetic footwear, have now been extended to include exporters of shoe uppers. Additionally, the permissible window for re-export of finished goods has been extended from six months to one year for exporters of leather garments, textile garments, and other leather products.
• Customs Relief for Individuals and Health Sector: The tariff rate on all dutiable goods imported for personal use has been halved from 20% to 10%, aimed at reducing the cost of personal imports and enhancing affordability. In a health-focused move, basic customs duty has been exempted on 17 medicines used in cancer treatment. Moreover, imports of drugs, foods for special medical purposes, and treatments for seven additional rare diseases have been made duty-free when imported for personal medical use.
• International Financial Services Centre ( IFSC) Incentives: To strengthen India's position as a global services and financial hub linked to international trade flows, the tax holiday period for IFSC units has been extended to allow a 10- 20 year deduction within a 25-year block, while Offshore Banking Units may avail a continuous 20-year holiday. Post the tax holiday, a concessional tax rate of 15% will apply, providing long-term certainty and encouraging sustained operations. Global Treasury Centres have also been exempted from deemed dividend provisions to improve cash pooling and capital efficiency.
• AI Data Centres and Cloud Infrastructure Incentives: Emphasising the strategic importance of digital infrastructure, the Government has prioritised large-scale investments in data centre and AI computing ecosystems. To catalyse long-term global capital flows, the Budget proposes a tax holiday until 2047 for foreign companies providing cloud services to global customers through India-based data centre infrastructure, subject to servicing Indian customers via a domestic reseller entity. Additionally, a 15% safe harbour on cost has been introduced where the Indian data centre operator is a related entity.

These reforms signal a policy intent toward export facilitation, strategic import substitution in defence and aviation, and relief to end-users through tariff rationalisation.

V. Labour and Employment Law

A. Labour Code Implementation and 2025 in a Glance

In November 2025, the four Labour Codes were brought into force, replacing 29 fragmented labour statutes with a unified framework governing wages, industrial relations, occupational safety and social security. The Codes seek to simplify compliance, enhance workplace protections and extend statutory benefits to unorganised, gig and platform workers. Key features include the introduction of a 'national floor wage' guaranteeing a statutory minimum wage for all workers, statutory assurance of gender-neutral remuneration and employment opportunities, and the formal extension of social security coverage to gig and platform workers.²²

Procedurally, the framework streamlines compliance through a single-window system for registration, licensing, and periodic returns. Dispute resolution has been rationalised through dedicated Industrial Tribunals, preceded by mandatory conciliation. Further, the decriminalisation of minor offences replaces incarceration with monetary penalties for first-time non-compliance. By extending provident fund and gratuity benefits to fixed-term and short-duration workers, the Codes seek to balance workforce protection with ease of doing business, signalling a shift towards a simplified, trust-based labour enforcement regime..

B. Economic Survey 2025–26 on Employment

The Economic Survey 2025–26 reported a strengthened labour market, driven by higher formalisation and reform-led job creation. It observed an increase in the labour force participation and a decline in unemployment, with employment gains concentrated in industry and services. The Survey highlighted that construction and manufacturing benefitted from sustained infrastructure spending, while services such as IT, BFSI, and logistics continued to expand. The Survey also records rising female labour participation, supported by measures such as enhanced maternity benefits and more inclusive workplace practices. While productivity gains remain uneven, the Survey identifies effective implementation of the Labour Codes as a key catalyst for further formalisation, improved income security, and sustained employment growth.

C. Budget 2026–27: Measures on Labour and Employment

Budget 2026–27 continues the government's push toward inclusive employment growth and skill-oriented development, with a strong emphasis on aligning education with employment pathways and expanding women-led rural entrepreneurship:

• High-Powered 'Education to Employment and Enterprise' Standing Committee: The Budget proposes the creation of a dedicated Standing Committee to identify actionable reforms that enhance employment outcomes through service sector development. The committee will formulate strategic recommendations to position India as a global service leader with a 10% share of global services exports by 2047. Its mandate includes identifying key subsectors for employment generation, assessing the impact of AI and emerging technologies on job markets, and aligning education and skilling initiatives with future labour market needs.
• SHE Marts for Rural Women Entrepreneurs: The Budget introduces Self-Help Entrepreneur (SHE) Marts, community-owned retail outlets designed to support rural women-led enterprises. These platforms will offer localised sales infrastructure and provide market access for goods and services produced by women entrepreneurs, reinforcing the government's commitment to grassroots enterprise and female economic participation.

These measures underscore a dual approach to labour market reform: long-term institutional planning and immediate grassroots empowerment. Further implementation details will be critical to evaluating their reach and effectiveness.

Footnotes

1. Ministry of Finance, Recommendations of the 56th Meeting of the GST Council held at New Delhi, today, https://gstcouncil.gov.in/sites/default/files/2025-09/press_release_press_information_bureau_0.pdf#:~:text=Rationalisation%20of%20the%20current%204,select%20few%20goods%20and%20services

2. Government of India, Press Information Bureau, Union Minister of Finance and Corporate Affairs Smt. Nirmala Sitharaman Launches Goods and Services Tax Appellate Tribunal (GSTAT) in New Delhi, Today, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2170932®=3⟨=2

3. DD News, GST Collections Rise 6.1% in December to Rs 1.75 Lakh Crore, https://ddnews.gov.in/en/gst-collections-rise-6-1-in-december-to-rs-1-75-lakh-crore/#:~:text=Gross%20Goods%20and%20Services%20Tax,regime%20was%20launched%20in%202017.

4. A2Z Taxcorp, From Record Collections to Reform Momentum: Economic Survey 2025-26 Underscores GST's Strong Performance and Transformational GST 2.0 Rollout, https://a2ztaxcorp.net/from-record-collections-to-reform-momentum-economic-survey-2025-26-underscores-gsts-strong-performance-and-transformational-gst-2-0-rollout/

5. Economic Survey 2025-2026

6. Economic Survey 2025-2026

7. National Statistical Office, Ministry of Statistics & Programme Implementation for the year 2023-24. Portal of Directorate General of Commercial Intelligence and Statistics for the year 2024-25.

8. Total employment reported by the MSMEs on the Udyam Registration Portal as on 09.01.2026, https://tinyurl. com/t557udxr.

9. RBI Bulletin, October 2025: https://tinyurl.com/2d59t9vx.

10. Ministry of Micro, Small and Medium Enterprises.

11. Supra Note 1

12. Inputs from Ministry of Micro, Small and Medium Enterprises (MSMEs)

13. Press Information Bureau, Ministry of Finance. Summary of Union Budget 2026–27, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2221458®=3⟨=2

14. Government of India, Ministry of Finance, Key Features of Budget 2026-2027, https://www.indiabudget.gov.in/doc/bh1.pdf

15. Dhoundiyal, S., & Nanda, D. Mondaq, India-UAE BIT, 2024 – A Cautious Balancing of Rights, Mondaq https://www.mondaq.com/india/inward-foreign-investment/1593596/india-uae-bit-2024-a-cautious-balancing-of-rights

16. Dhoundiyal, S., & Nanda, D. Mondaq, Decoding the India–UK CETA: An overview of trade, services and compliances, https://www.mondaq.com/india/international-trade-investment/1681222/decoding-the-indiauk-ceta-an-overview-of-trade-services-and-compliances

17. House of Commons Library, UK-India Free Trade Agreement, https://commonslibrary.parliament.uk/research-briefings/cbp-10258/#:~:text=The%20UK%20and%20India%20signed,aim%20of%20increasing%20economic%20growth

18. PwC, India Budget 2025: Impact on Foreign Investors and Multinationals, https://www.pwc.com/us/en/services/tax/library/india-budget-2025-impact-on-foreign-investors-and-multinationals.html#:~:text=Increase%20in%20customs%20duty%20rates,and%20customs%20tariffs

19. Economic Survey 2025-2026

20. Economic Survey 2025-2026

21. Economic Survey 2025-2026

22.Government of India, Ministry of Labour and Employment, Government Makes the Four Labour Codes effective to Simplify and Streamline Labour Laws, https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2192463®=3⟨=2#:~:text=,500%2B%20workers%2C%20improving%20workplace%20accountability

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