Budget 2026: Why tax administration, not legislation, may take centerstage for FM Sitharaman this year

As India heads into the Union Budget on February 1, 2026, expectations around direct tax changes are unusually restrained. The reason is structural: the new Income Tax Act, 2025 is set to come into force from April 1, 2026, following an extensive consultative process involving a Parliamentary Committee and wide stakeholder engagement. Against this backdrop, any substantive amendments to a law yet to be implemented would risk diluting the intent of a clean-slate reform.

Dinesh Kanabar, Chairman and CEO, Dhruva Advisors India, believes the real opportunity in Budget 2026 lies not in rewriting tax law but in improving how it is administered. “There is now broad recognition that India’s tax challenges stem less from legislative design and more from implementation and administration,” he said. Despite reforms such as faceless assessments, digitisation and reduced physical interface, tax disputes remain pervasive, pointing to deeper systemic issues.

Kanabar sees the Budget’s policy expectations falling into four broad baskets:

Tax Deduction at Source

The first relates to easing compliance, particularly around tax deduction at source (TDS). While TDS is merely a mechanism for tax collection, the current framework prescribes multiple rates across numerous sections, leading to interpretational disputes and litigation, often without any real revenue loss. Rationalising TDS into two or three broad rate categories—such as one for salaries, one uniform rate for most non-salary payments, and a higher rate for exceptional windfall incomes—could sharply reduce compliance burdens. For large taxpayers, this would free up significant resources currently devoted to managing withholding tax risk.

Tax policy

The second basket focuses on using tax policy levers to support growth in high-technology manufacturing. India has articulated ambitions to emerge as a global hub for sectors such as artificial intelligence, semiconductors and advanced electronics. Yet, unlike many competing jurisdictions, it offers limited tax incentives for research and development. Kanabar argues that carefully designed R&D incentives, especially for sunrise sectors, merit reconsideration. This becomes more relevant amid changing global mobility trends, with highly skilled Indian professionals potentially returning due to visa constraints abroad. A supportive domestic tax ecosystem could help India absorb this talent productively.

Tax litigation

The third area of concern is tax litigation. Backlogs are substantial, and at current disposal rates, clearing existing cases could take several years. This hurts both sides: the exchequer faces delayed revenue realisation, while taxpayers carry prolonged contingent liabilities that affect business decisions. India’s past dispute resolution schemes have shown encouraging results, prompting calls for a more comprehensive framework covering both direct and indirect taxes, including customs. Such a move could unclog appellate systems and provide immediate fiscal and economic benefits.

Tax administration

Finally, Kanabar emphasises the need for a more facilitative approach to tax administration. Issues such as mechanical reopening of assessments, indiscriminate notices and lack of accountability continue to dent taxpayer confidence. While faceless systems have reduced certain frictions, they have also introduced concerns around proportionality and responsiveness.

In sum, Budget 2026 may be less about new tax provisions and more about making the system work better. Administrative reform—anchored in ease of compliance, dispute resolution and respect for taxpayer sentiment—could prove more impactful than legislative change.