Reckoners for Budget 2026: A quiet reset before the new tax era?

The Context

In the 2025 Budget, FM Sitharaman made a clarion call: “trust first, scrutinise later.” The question to reflect upon is to what extent she had delivered on her compact. Clearly, the swiftness with the manner in which the new Income-tax Act of 2025 (hereinafter the IT Act, which will be applicable from April 01, 2026) was implemented, is suggestive of her dexterity. Yes, there are naysayers about the 2025 Act being a reprise of the 1961 statute, but certainly, the size and simplicity of language, coupled with the concordance of the law shall (hopefully) ensure the curtailment of disputes beside achieving simplification. In addition, several glitches on administration of the IT Act have been addressed. A doff to her promise of scrutinising less than 1% of taxpayers, a rather audacious goal, has been delivered.

Her challenge in 2026 is different: how will she address slowdown in tax collections to reach her 2027-28 fiscal goal? In our view, it poses an opportunity to bring greater efficiencies in the quality of tax enforcement machinery and administrative mechanisms. At the core is her Revenue Officers' overzealous attempt to assert source-based taxing rights, sometimes overriding international treaty obligations. The Budget shall do well to address these persistent chinks in the administrative arsenal and deliver a panacea that is consistent, clear, and concomitant with global best practices. We have analysed salient themes, which deserve attention.

Policy Signals

The release of two detailed working papers by NITI Aayog in October 2025, one on Permanent Establishment and Profit Attribution, and the other on Decriminalisation under tax laws, perhaps sets the tone for expectations from the Budget. Permanent Establishment (PE) and Profit Attribution

Disputes relating to the existence of a taxable presence in India and attribution of profits to such presence continue to account for a significant share of high-value tax litigation with non-resident taxpayers in India. Currently, profit attribution by tax authorities often relies on ad-hoc estimates; a discretionary power with lack of administrative guidance. Such application of Rules has often led to varied interpretations, arbitrary assessments, frequent court challenges, and inconsistent jurisprudence.

The NITI Aayog working paper recognises that while the OECD’s arms-length standard authorised approach relies on detailed functional, asset, and risk analysis, such exercises can be complex and contentious, often leading to prolonged disputes. The NITI paper explores the possibility of an optional presumptive taxation regime for certain foreign enterprises, wherein eligible taxpayers could opt to be taxed on presumptive basis.

Internationally, simplified or presumptive regimes prevail in several jurisdictions, including Brazil, Turkey, and parts of Africa. NITI’s proposal for an optional presumptive regime offers a pragmatic alternative, though the prescribed presumptive rates for various classes of industries are devoid of commercial realities. To tax digital and e-commerce players at 30 percent of their gross revenue makes it least attractive to any class of taxpayers, no matter what the business model is! By signalling intent and laying the groundwork for reasonable profit attribution ratios in consultation with the industry, the Budget offers a valuable opportunity.

Decriminalisation

Another area expected to receive Budget attention is decriminalisation under direct tax laws. The Jan Vishwas Act of 2023 for decriminalisation of Offences under other statutes is a welcome step. In fact, FM Sitharaman expanded its scope in 2025 with the announcement of Bill 2.0. The past decade has witnessed legislation of onerous penal and criminal provisions for non-compliances, some of them are mere technical breaches. These have impacted the morale of compliant taxpayers and merits an urgent relook. The NITI Aayog paper supports this approach, suggesting that criminal sanctions be reserved only for cases involving wilful and serious misconduct (retaining six offences for full criminalisation and 17 for partial criminalisation).

Budget 2026 may seek to further rationalise prosecution provisions and reduce overlapping civil and criminal consequences, while retaining deterrence where warranted, as suggested in NITI paper.

Preparing the 2025 Act for Implementation

The new Income-tax Act, 2025 marks a decisive step toward modernizing India’s tax architecture. It streamlines provisions, aligns with global best practices, and lays the foundation for a more transparent, technology-driven, and trust-based regime. Equally critical, however, is the task of operationalising the 2025 Act. Much of the current tax framework operates through subordinate legislation such as rules, forms, notifications and circulars. As the new Act takes effect, there will need to be freshly notified to ensure continuity and avoid procedural gaps. In this context, the 2025 Act provides that any circular, direction, instruction, notification, order, rule, or scheme issued under the 1961 Act will be deemed to be issued under the 2025 Act, so long as they are not inconsistent with the 2025 Act.

However, the timing of notifications of rules has become particularly important, especially for processes such as advance pricing agreement applications, lower tax deduction certificates, etc., which are typically required to be complied before the start of new financial year. With the subordinate legislation (under the new Act) yet to be notified, questions have arisen on whether such applications should be made under the extant 1961 Act or the new 2025 Act. While the law provides continuity, practical uncertainties remain around the format and manner in which such applications should be made during the transition period.

Addressing the Persistent Pain Points

Budget 2026 is an opportunity to address long-standing disputes. There is wide speculation that the Budget shall witness another tax dispute settlement scheme, on the back of two successful schemes in the past six years, though we do not share such optimism. Instead, an overhaul of the first Appellate Commissioner, wherein most disputes lie, is an anvil. Similarly, the Board of Advance Ruling, an experiment to have two Commissioners issue Rulings has failed to deliver on its promise, and hence, a case is made for the reconsideration of erstwhile Advance Ruling Authority, a quasi-judicial forum led by a High Court/ Supreme Court judge to instil confidence amongst taxpayers.

As India stands on the cusp of a new tax era, Budget 2026 is more than a fiscal exercise - it is a litmus test of intent for FM Sitharaman and her articulation for a new, improved, and robust tax framework in the last year’s Budget. By laying the groundwork for progressive ideas like presumptive taxation and deeper decriminalisation, the government can, far beyond administrative gambits, signal that reform is not episodic but structural. With the Income-tax Act, 2025 waiting in the wings, clarity on subordinate legislation and a credible roadmap for implementation will be critical. Businesses are seeking the trifecta of predictability, trust, and efficiency. The Budget offers a timely opportunity to reset the age-old narrative and prepare India for a tax regime that is avant garde, collegial, and globally competitive.

(Views are personal; Mukesh Butani is the Managing Partner, while Seema Kejriwal is a Partner with the International Tax & Transfer Pricing team at BMR Legal Advocates)

The authors would like to thank Shruti Agarwal, Managing Associate at BMR Legal Advocates, for her inputs and research.