Budget 2026: A Reformative Turn in India’s Direct Tax Regime

The Budget 2026 has been heralded as a ‘reformative budget’ aimed at strengthening economic confidence and improving the business environment. The Budget signals a gradual shift from adversarial enforcement towards trust-based compliance with rationalisation of penalties, procedural simplification with the use of digital medium clarifying co-webs leading to litigation on procedural interpretation, and targeted decriminalisation.

For businesses, these measures are significant as they seek to recalibrate the balance between tax enforcement and compliance certainty in an environment where dispute resolution costs and timelines have long been a concern.

A key highlight is the consolidation of assessment and penalty proceedings under a common order, with an objective to eliminate the duplicity of proceedings. Under the current framework, penalty proceedings, though initiated with assessment, are generally kept in abeyance till the disposal of the quantum appeal.

Conventionally, the administration does not initiate a penalty unless the proceedings are time-barred or the second appellate authority confirms the demand of the tax officer.  Hence, the move to consolidate into a single order may alter such a long-standing equilibrium, with penalties crystallising before the appellate tribunal confirms the demand. Further, the proposal raises procedural fairness concerns given the officer’s biased mindset to frame the assessment. This provision requires further calibration since penalties are levied for egregious assessments.

Budget proposals reinforce a transcendental shift in reprimand, moving from a prosecution-oriented regime to a certainty-based compliance model. For decades, the extant law has criminalised a variety of technical and procedural defaults, which are not just broad-based but tend to create a debilitating ‘fear psychosis’ in the mindset of taxpayers, particularly for procedural lapses. Building on the Jan Vishwas law, an enactment to decriminalise technical breach under various statutes, the Budget proposals lay out decriminalisation as an explicit theme, signalling that criminal law should be reserved for wilful misconduct and serious revenue risk.

Measures such as converting certain penalties into fees, not penalising taxpayers for non-production of books of account and TDS defaults, depict a clear and pellucid move from adversarial tax administration and abuse of discretionary power. The approach aligns with the framework articulated by NITI Aayog, which has consistently argued that prosecution must be a measure of last resort in fiscal statutes. Besides the principles of proportionality, the refinement should reflect avoidance of ‘double jeopardy’, precluding the income-tax prosecution where the same offence has already been prosecuted under other laws.

The Budget has introduced compliance-oriented measures, suggestive of flexibility and giving an opportunity to correct anomalies and mistakes in their filings. Rationalisation measures include staggering the due dates for filing returns across a class of taxpayers, extension of the time limit for filing revised returns, and permitting taxpayers to file updated returns, even after the issuance of a reassessment notice. Such flexibility acknowledges the realities of complex accounting and interpretational uncertainty, particularly for businesses with multiple reporting obligations. These measures shall curtail disputes and prevent them from a cascade effect across multiple years. Over time, such measures are likely to improve the quality of compliance and enforcement, leading to an increase in administrative efficiencies.

The proposed Foreign Assets of Small Taxpayers-Disclosure Scheme, 2026, adopts a calibrated approach to addressing legacy non-compliance for small taxpayers by offering a limited window for disclosure of undisclosed foreign assets. The scheme seeks to expand the compliance base while avoiding harsh consequences for minor lapses of students and short-term stay of Indians employed overseas. Such measures reflect an intent to discriminate between compulsive defaulters for non-disclosure and inadvertent lapses, if any.

Viewed holistically, the proposals reflect a conscious effort to reorchestrate the new tax code ahead of its implementation, which comes into force from 1 April 2026. While the 2025 Act was not a complete rewrite of the Income-tax Act, 1961, the budget proposals introduce some meaningful refinements before it becomes operational. The combined thrust of procedural simplification, compliance flexibility, targeted decriminalisation and dispute containment underscores a clear policy mandarin for trust, efficiency, and voluntary compliance. Though certain areas may still warrant further refinement, the overall direction of reform is rather constructive and welcome. It certainly signals a policy intent to move away from an adversarial approach towards a more predictable, proportionate, and trust-based system. The Budget announcment shall herald a forward-looking tax regime, backed by the aforementioned epithets.  Views are personal. Mukesh Butani is the Managing Partner, Nikky Jhamtani is a Principal Associate, and Spandana Koona is an Associate at BMR Legal Advocates.