Union Budget 2026–27: FICCI seeks Direct Tax reforms to ease compliance, boost investor confidence

As the Union Budget 2026–27 draws closer, the Federation of Indian Chambers of Commerce and Industry (FICCI) has presented a comprehensive set of recommendations on direct tax reforms, aimed at improving the efficiency of India’s tax administration, easing compliance, and stimulating economic activity. The industry body has emphasized five key areas that need urgent attention to enhance taxpayer confidence, support investment, and improve the ease of doing business.

1. Reducing pendency

FICCI highlighted the massive backlog of 5.4 lakh appeals pending before Commissioners of Income Tax (Appeals) [CIT(A)] as of April 2025, involving disputes worth over ₹18.16 lakh crore. The body noted that the Faceless Appeal regime, introduced in 2021, while transformative, has created inefficiencies due to technology unfamiliarity and limited monitoring.

FICCI recommended that the Central Board of Direct Taxes (CBDT) introduce a dual-track system: fast-track disposal for simple, low-value cases and detailed hearings for complex, high-value matters. It also called for time-bound disposal targets, age-based prioritization of cases, and filling 40% vacancies at the CIT(A) level through promotions and lateral hiring.

To ensure fairness, FICCI suggested mandatory virtual hearings upon request, with improved document display capabilities and a mandatory stay of tax demand for appeals pending beyond two years. Allowing refunds during the pendency of appeals, it said, would ease liquidity pressures on taxpayers and reinforce trust in the faceless system.

2. Demand provisions

FICCI urged rationalisation of stay provisions under which taxpayers must deposit 20% of the disputed demand to obtain a stay during appeal. It suggested introducing flexibility through alternative guarantees—such as bank guarantees or insurance bonds—to prevent unnecessary working capital stress.

The industry body cited international practices like those of the Australian Taxation Office, which allow non-cash securities in place of upfront deposits. FICCI also called for real-time integration of stay orders with the Central Processing Centre (CPC) to prevent automatic refund adjustments against stayed demands.

3. Tax neutrality

To promote business restructuring and reduce pressure on the National Company Law Tribunal (NCLT), FICCI sought tax neutrality for fast-track demergers under Section 233 of the Companies Act, 2013.

Currently, the Income Tax Act, 2025 does not recognise such transactions for tax neutrality, limiting the benefit only to court-approved schemes. FICCI argued that this omission runs counter to the government’s “Ease of Doing Business” agenda. Since fast-track mergers are subject to shareholder and regulatory approvals, the chamber urged that Section 2(35) of the ITA, 2025 be amended to include Section 233, ensuring parity and promoting faster intra-group restructurings.

4. TDS compliance

Calling India’s TDS framework “overly complex and fragmented,” FICCI pointed out that there are currently 37 categories of TDS rates, ranging from 0.1% to 30%. It proposed a three-tier TDS structure—(1) salary at slab rates, (2) lotteries and online games at the maximum marginal rate, and (3) a standard rate for all other payments.

Additionally, it suggested exempting GST-compliant B2B transactions and low-yield TDS categories like purchase of goods at 0.1%, which add compliance burden without material revenue impact. FICCI also proposed a “negative list” exempting senior citizens, farmers, and banks from TDS obligations.

5. Foreign OEMs

Finally, FICCI recommended that the government clarify that storage of raw materials or components in India by foreign Original Equipment Manufacturers (OEMs) for just-in-time supply to contract manufacturers does not create a “business connection” or permanent establishment (PE) in India.

This, it said, would encourage foreign firms to deploy advanced machinery and supply chain infrastructure in India, thereby strengthening the Make in India initiative and boosting manufacturing competitiveness.

FICCI’s proposals, if implemented, could significantly ease tax administration, reduce litigation, and improve capital efficiency for businesses, while aligning India’s taxation regime with global best practices. The industry hopes that the Union Budget 2026–27 will prioritise these reforms to build a more transparent, predictable, and investor-friendly tax environment.