EY India expects Union Budget 2026 to prioritize growth continuity, Tax certainty, and sector-led investment

Key expectations from the Union Budget 2026

EY India suggests key reforms in the Indirect Tax landscape to enhance ease of doing business in India.

Dispute Resolution Scheme: A one-time settlement scheme under Customs Law should be introduced to facilitate the resolution of pending disputes. This initiative would follow the successful ‘Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019’, which helped monetize revenue blocked in litigation.
Extension of Customs Advance Rulings Validity: The validity of Advance Rulings should be extended from three to five years by amending Section 28J (2) of the Customs Act, 1962. This extension will enhance tax certainty and provide businesses with a clearer framework for compliance, reducing the risk of disputes.
Simplification of Customs Tariff Structure: The current customs tariff framework should be simplified to reduce compliance burden on importers. This includes sector-wise customs duty rationalization and aligning tariff rates with global standards ensuring Indian goods remain competitive in international markets.

The Direct Tax framework is expected to undergo critical changes aimed at enhancing certainty and compliance.

Smooth implementation of the New Income Tax Act 2025: Detailed guidelines and FAQs should be provided to minimize confusion during the transition from the Income Tax Act, 1961 to the new Act. This is crucial to avoid litigation and ensure a smooth transition for taxpayers.
Certainty and predictability: Establishing a stable tax environment by minimizing frequent changes in tax rates is essential. A predictable tax policy builds trust and improves compliance, which is vital for enhancing revenue collection.
TDS Rationalization: With 37 different types of payments to residents where TDS rates vary from 0.1% to 30%, TDS provisions become a fertile ground for disputes relating to categorisation and interpretation. In many instances, industry faces cash flow blockages awaiting refunds, and the government incurs avoidable interest cost on such refunds. Budget 2026 should lay down a roadmap for rationalisation of TDS rate structure with no more than three-four rates. B2B payments subject to GST may be exempted from TDS as information relating to such transactions is already captured in Form 26AS/AIS.
Accelerated depreciation: To boost investment and stimulate growth in the manufacturing sector, the Government should consider reintroducing accelerated depreciation as a targeted fiscal incentive. This should be made available as part of existing concessional corporate tax regime of 22%/15%^[1] itself such that higher depreciation does not trigger Minimum Alternate Tax (MAT) for companies. In the wake of global economic uncertainties and India's ambition to become a manufacturing hub under initiatives like "Make in India," reinstating this benefit could provide much-needed support to domestic manufacturers. It would not only enhance competitiveness and productivity but also attract both domestic and foreign investment, generating employment and driving long-term economic growth.
Incentivising employment: To incentivise organisations to generate new employment opportunities, the monthly employee cost limit of INR 25,000 should be increased to Rs 1,00,000.
International tax clarity: Providing tax certainty for foreign investors is critical. In the absence of specific rules related to determination of permanent establishment (PE) and profit attribution, these become a common ground for litigation. Clear and codified rules will make taxation predictable.

An optional presumptive regime could be considered for foreign entities in certain sectors such as turnkey projects, technical services, digital and e-commerce, general services like consultancy, management and software. This has also been recommended by Niti Aayog in its October 2025 report.

Additionally, rationalizing Safe Harbour provisions can make them more attractive as an Alternative Dispute Resolution (ADR) mechanism. Post the announcement in Budget 2025, the government had constituted a Working Group which held consultations with stakeholders regarding Safe Harbour rules/ turnover threshold and other issues. It is expected that Budget 2026 may bring in the revised Safe Harbour Rules.

Transfer pricing provision rationalisation: Reduce the compliance burden on foreign companies not having a permanent establishment in India and receiving royalties, fee for services, interest income on loans by exempting them from transfer pricing documentation as these are being reported in any case by the Indian taxpayer.
Decriminalisation: The Government may consider and implement Niti Aayog's October 2025 report on decriminalisation of income tax law to make it consistent with decriminalisation of other laws, reduce litigation, build trust and improve ease of doing business. The recommendations include (a) 12 offences to be fully decriminalized, (b) 17 offences to be partially decriminalized and (c) 6 offences to be retained as criminal with proportionate punishment.
Clarity on Virtual Digital Assets: Establishing a clear legal framework for the taxation of cryptocurrencies and non-fungible tokens (NFTs), including guidelines on losses incurred, will help in compliance and provide clarity to investors in the digital asset space.

Sector-specific expectations

EY India identifies several key sectors that require targeted reforms to drive growth and investment.

Retail: Implementing an online module for amending Bill of Entry and payment of customs duty will enhance operational efficiency for importers and exporters. This system should be linked with GST returns to streamline compliance and reduce administrative burdens.
Aerospace and Defence: Extending tax exemptions to aviation training simulation devices and aircraft ground support equipment will promote a comprehensive aviation leasing landscape in India. This will support the growth of the aviation sector and enhance India's position in global aviation markets.
Chemical sector: Reinstating R&D incentives is crucial to encourage innovation within the chemical industry. Providing 200% green credits for investments in renewable energy will incentivize companies to adopt sustainable practices and enhance their competitiveness.
Technology, Media, and Telecommunications (TMT): The TMT sector is expected to benefit from reforms that allow businesses to claim Input Tax Credit (ITC) on essential services currently excluded under Section 17(5) of the CGST Act. This includes services like insurance and renting of motor vehicles, which are necessary for business operations. Additionally, the introduction of centralized registration for large taxpayers will simplify compliance processes and reduce administrative burdens.

Financial services:
- Tax holiday for International Financial Services Centre (IFSC) units: IFSC units are provided an income-tax holiday for a period of 10 years (from a block of 15 years). Sectors such as banking, insurance, and fintech require a longer operational horizon to achieve full-scale maturity and sustained profitability. The income-tax holiday for IFSC units should be further extended and once the holiday ends, the IFSC units may be taxed at 15% concessional tax rate to maintain attractiveness and to foster sustained growth.
- Tax Pass-Through for Special Situation Funds: Providing a complete tax pass-through for income earned by Special Situation Funds will encourage investment in distressed assets, thereby supporting economic recovery.
Life Sciences:
- Patent Income Benefits: Extending patent box benefits to all income streams related to patents, including royalty income from licensing and sale of patented products, will incentivize R&D and innovation in the pharmaceutical sector.
- Increased R&D Deductions: Increasing deductions for R&D expenses to 200% will support the pharma sector’s role in Atmanirbhar Bharat, encouraging investment in critical research and development activities.

Overall, EY India expects Union Budget 2026 to reinforce India’s growth narrative by balancing fiscal prudence with targeted reforms. A predictable policy roadmap, anchored in tax certainty and sustained public investment, could unlock private capital, enhance competitiveness, and support inclusive economic growth.

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