Budget 2026: Avoiding populism, betting on reliance and tax certainty

The article was first published in The Indian Express Online on February 04 2026. Please click here to read the article.

The Finance Minister tabled her ninth consecutive Union Budget 2026 on February 1 and reinforced the government’s commitment to fiscal prudence, stability, and long-term growth in pursuit of the vision of Viksit Bharat. From an economy perspective, 10.4 per cent nominal GDP growth is projected for FY 2026-27, supported by a continued push to expand the manufacturing sector while reaffirming the critical role of the service industry. In a dynamic global environment, the government is striving to strike the right balance – strengthening strategic partnerships (including the recent EU and US trade deals) while shifting from an “import-substitution” mindset to one of strategic resilience and indispensability.

On the tax front, the Finance Minister confirmed that the Income Tax Act, 2025, will come into effect from April 1, 2026, while accompanying Rules and simplified forms will be notified shortly. The key tax proposals relate to supporting investments in the field of technology, focusing on simplification, changes relating to capital markets and reducing tax controversies.

Technology sector

India’s IT industry is in its next phase of transformation, driven by the rapid adoption of Artificial Intelligence (AI). Given the significant infrastructure investment that AI demands, the Budget proposes a tax holiday until 2047 for foreign companies using data centre services from facilities located in India. This is a significant announcement and will go a long way in promoting the data centre business in India. Additionally, a 15 per cent safe harbour margin has been introduced for data centre services involving related parties, thereby reducing benchmarking disputes in an industry where comparability challenges are common. While the government has proposed a significant boost for the data centre business, it would be important for it to continue focusing on creating the right ecosystem for the data centre business in India.

From an Indian transfer pricing perspective, the government has further proposed a uniform 15.5 per cent safe harbour margin by consolidating multiple categories of activities and increasing the eligible revenue threshold to Rs 2,000 crore. This is a particularly welcome step and had long been an ask of the industry – in a recent survey conducted by KPMG, only 4 per cent of the respondents were seemingly in agreement with the existing framework of the safe harbour provisions.

Further, the reduction of the timeline for concluding Unilateral Advance Pricing Agreements (UAPAs) to two years is another important and long-awaited improvement. The above-mentioned proposals would provide a shield to Global Capability Centres (GCCs) from significant litigation on the transfer pricing front.

Focus on simplification

Continuing the broader reform trajectory of previous announcements, Budget 2026 aims to further rationalise several provisions of the tax law. For example, the due dates for filing returns have been further staggered to give taxpayers more time. TDS/ TCS rates have been further streamlined, and the tax rate for IFSC units has been pegged at 15 per cent, following the extension of the 20-year tax holiday.

A significant push has also been made to ease compliance: One, several penalty and prosecution provisions have been eased, with procedural and technical defaults, especially relating to TDS, documentation, and filing delays, having been decriminalised.

Two, the introduction of a single combined order for assessment and penalty proceedings will reduce multiplicity of proceedings. Three, the proposal to not levy interest on penalties until disposal of appellate proceedings enhances fairness in dispute resolution. Four, taxation of buyback is reinstated to capital gains taxation with an additional top-up tax for promoters, bringing an effective tax rate of 22 per cent for domestic corporate promoters and 30 per cent for other promoters. This leads to additional taxes for promoters; however, retail investors benefit from the reinstatement of the position to capital gains taxation.

Litigation - Putting an end to long-standing controversies

The Budget seeks to settle several ongoing disputes, mainly on the validity of assessment involving the Document Identification Number (DIN), re-assessment proceedings by the Jurisdictional Assessment Officer/ Faceless Assessment etc. These matters have been addressed through retrospective amendments to the Income Tax Act, 1961, with parallel changes proposed in the 2025 Act. This move is expected to significantly reduce pending litigation across appellate forums and courts, delivering much needed tax certainty.

On the indirect tax side, the amendment to the place of supply rules for intermediary services, that is, shifting taxation from the location of supplier to the location of recipient, enables such services provided from India to qualify as zero-rated supplies when rendered to recipients outside India. This is a highly positive development for the services sector.

Last year, the government extended GST and income and tax relief to the middle class. In contrast, Budget 2026 avoids any populist measures and instead focuses on higher capital expenditure, structural reforms, and long-term development priorities through a measured and forward-looking policy framework that prioritises stability, growth, and a predictable tax environment.