Budget 2026: Tax certainty, SME and customs reforms top Mukesh Butani’s Budget wishlist

As India heads into Union Budget 2026 amid global uncertainty and trade realignments, tax certainty, capital expenditure and tariff reforms are emerging as key policy priorities. With geopolitical risks and tariff pressures weighing on the global economy, the challenge for policymakers is to protect domestic stability while sustaining long-term growth.

Mukesh Butani, Founder and Managing Partner at BMR Legal, says the Budget must strike a pragmatic balance between resilience and ambition. He argues that reviving private capex, ensuring consistency and clarity in tax policy, and aligning customs duties with India’s expanding network of free trade agreements are critical. In his view, these reforms can strengthen competitiveness and investor confidence without relying on fresh tax concessions.

Sakshi Batra: Amid global uncertainty and tariff pressures, will Budget 2026 focus more on shielding the economy from global shocks or accelerating long-term growth?

Mukesh Butani: The balance will be pragmatic—protecting India from global headwinds such as geopolitical risks and tariffs, while continuing to push the Viksit Bharat growth agenda. This is not an either-or choice; it is about combining resilience with ambition in a volatile world. The India–EU trade deal has come at an opportune time and offers partial insulation from shocks linked to the US. If a US trade deal materialises in the coming months, it would be an added growth booster.

The key challenge remains capital expenditure. Government capex of around ₹12 lakh crore is not being matched by private sector investment. The Budget is also likely to rely on non-tax revenues from RBI and PSU dividends, along with selective divestment, while keeping a focus on lowering the debt-to-GDP ratio going forward.

We could also see customs duty rationalisation and an amnesty scheme, driven by the rapid pace of FTAs—with the UK, EU and potentially the US. These agreements will require a reworked tariff structure to align with India’s evolving trade strategy.

Sakshi Batra: Should customs duty policy now focus more on export competitiveness than revenue protection? Can fixing inverted duty structures become a silent growth booster in this Budget?

Mukesh Butani: Addressing the inverted duty structure is an ongoing process, driven by experience, and the last three Budgets clearly reflect that. Much will depend on what this Budget delivers. Some economists argue for a comprehensive overhaul, with significantly lower customs duties on raw materials—barring a few exceptions—and higher duties on finished goods, effectively incentivising domestic manufacturing through lower input tariffs.

Another key objective is enabling seamless movement of intermediate goods and encouraging both Indian and multinational companies to shift their value chains into India—something that cannot be achieved without fixing inverted duties.

A balanced duty structure would help Indian manufacturers compete better in price-sensitive global markets facing cost pressures. Importantly, fixing inverted duties is not a one-time exercise but a significant reform. If the customs rejig committee’s recommendations are implemented, this Budget could see a substantial overhaul of the customs framework.

Sakshi Batra: With GST cuts and slowing GDP raising revenue concerns, how can the government keep tax collections buoyant while sustaining capex?

Mukesh Butani: Tax collections need to be seen in two parts -- GST and direct taxes. When the government lowered GST on items in the common man’s basket, it was clear collections would slow initially, with the assumption that higher consumption would offset this over time through economies of scale.

As long as growth and consumption remain strong—which is visible across automobiles and several sectors -- there is little cause for concern. Any recent blip was partly due to rate resets ahead of Diwali, and the full impact may only be visible in the last quarter of the fiscal year.

The bigger concern is direct tax collections, especially from corporates, where growth has slipped into single digits. It is unclear whether this reflects higher refunds or weaker profitability. Since many companies catch up on advance tax payments in March, these numbers should be viewed cautiously.

If corporate tax collections still end the year in single digits, it would signal the need for deeper tax reforms. While the new income tax code is a step forward, much will depend on subordinate legislation and, importantly, administrative reforms to improve efficiency and boost collections over the medium to long term.

Sakshi Batra: Should Budget 2026 prioritise tax certainty over further tax concessions? What is the biggest unresolved tax ambiguity that needs attention?

Mukesh Butani: As a practitioner, tax certainty remains one of the key factors that can make foreign investors uneasy. However, tax certainty isn’t a single concept—it has multiple facets. It includes respecting double taxation treaties, avoiding retrospective amendments, and ensuring consistency in interpretation. There is no one-size-fits-all solution.

What is truly needed are deeper administrative reforms. When a tax policy or incentive is legislated, it must be implemented efficiently and in line with its policy intent, rather than being denied on technical grounds. Promising incentives and then withholding them creates uncertainty.

Certainty must be seen across multiple areas. Take sovereign wealth funds: the tax incentives introduced in 2020 on passive income, capital gains, interest and dividends were a strong move, and extending them later was welcome. But if the intent is clear, such incentives should be provided with long-term visibility—say 10 years upfront—rather than short extensions, so investors can plan with confidence.

Sakshi Batra: Is this the right time to revisit capital gains taxation for stability across asset classes, and could that help attract foreign investors back to India?

Mukesh Butani: The capital gains regime was largely rationalised in last year’s Budget, aligning rates across asset classes and taxpayers. Structurally, that work is mostly done. Recent outflows of institutional money have more to do with tax certainty. Some judicial rulings have unsettled investors by suggesting that tax treaty claims be examined through the lens of domestic anti-avoidance laws, creating nervousness among institutional investors.

While the Supreme Court’s interpretation is the law of the land, this presents an opportunity for lawmakers to step in and provide clarity. What needs to be clarified is that past assessments will not be reopened, India will continue to respect double taxation treaties, and treaties will override domestic law except in clear outlier cases where anti-avoidance provisions apply.

That assurance, in my view, is the single most important certainty signal India owes its institutional investors.

Sakshi Batra: Does India risk losing manufacturing investments due to high import duties on inputs? Are PLI schemes delivering results, or do they need a rethink?

Mukesh Butani: PLI spans multiple manufacturing segments and has been highly significant for industry, though it has not been without challenges. One key question remains whether it has delivered on employment, and the jury is still out on that.

PLI has clearly succeeded in certain sectors, especially mobile phones and electronics, which stand out as major beneficiaries. In a global electronics market of about $927 billion dominated by China, India has made progress but remains far behind China in scale and investment.

India achieved smartphone exports of around $18 billion in 2024, and even higher in 2025. This growth is not just about Apple alone, but a mix of PLI support and global value chains shifting to India.

There remains strong opportunity in sectors such as white goods and IT hardware, where some PLI schemes nearing expiry need review. While some sectors deserve continuity, others may see PLI withdrawn. Overall, PLI has been an important pillar for high-skill jobs and large-scale investment. Going forward, it may become more selective, addressing structural inefficiencies and potentially expanding into areas such as AI, space and robotics.

Sakshi Batra: Private capex remains weak despite government spending—what will it take to revive private investment?

Mukesh Butani: Private capex has remained weak despite strong government spending. The expectation that public infrastructure investment would crowd in private capex—especially in steel and cement—has not fully materialised.

Overall investment levels are low, with manufacturing capacity utilisation at around 75%, making fresh capex economically unattractive. Companies are also focused on short-term, quarter-to-quarter performance.

Experts argue that reviving private capex requires raising household incomes and savings to boost consumption, which would push capacity utilisation higher and eventually trigger new investment. Steps such as income tax rationalisation and GST cuts on mass-use items move in that direction, but the question remains whether they are sufficient.

There is also a need to redesign policies to ensure fair competition and provide targeted fiscal incentives for globally challenged sectors, rather than relying on blanket tax holidays.

Sakshi Batra: If you were to personally advise the Finance Minister, what is the one reform you would push hardest for in Budget 2026?

Mukesh Butani: India needs deep tax administrative reforms, especially to reduce compliance stress for SMEs under income tax and GST. Taxpayers must be segmented—SMEs should be treated differently from large taxpayers, face lower scrutiny and carry a lighter compliance burden. Enforcement should not treat every taxpayer with suspicion. Frauds are outliers and should be dealt with firmly, but India largely has a compliant business ecosystem.