Budget 2026: Push for Simplicity and Predictability in Direct Taxes

Against the backdrop of a shifting global tax landscape, India’s upcoming Budget 2026 can focus on simplification, certainty and growth. A key focal point will be the rollout of the new Income Tax Act, 2025, which is expected to modernise the existing tax framework and reduce ambiguities.

The new Income Tax Act, 2025, has already received Presidential assent on August 21, 2025, and is set to take effect from April 1, 2026. However, to date, no accompanying rules, circulars or forms have been notified or issued by the Government to facilitate implementation of the new Act. In this context, one expects limited tax announcements in this year’s Budget, focused primarily on outlining the manner of transition to the new Act and providing certainty for taxpayers navigating the new framework. The Budget may therefore deliver clarificatory measures, defer or phase out specific compliances, and align withholding and reporting positions to ensure a smooth transition from the erstwhile Income Tax Act being repealed.

The legislative exercise behind the simplified Income Tax Act was centred on enhancing clarity rather than introducing substantive policy changes. Pertinently, these structural changes are largely already in place in the form of the new Act. Therefore, any significant policy overhaul, taken together with these reforms, would usher India into a markedly new tax landscape.

In the past year, there has been substantial revenue loss due to the revision of income tax slab rates in the previous Budget and the revised Goods and Services Tax (GST) rates under GST 2.0. Against this backdrop, it is possible that the upcoming Budget may prioritise measures to widen the tax base to offset this shortfall. With respect to individual taxation, the Government continues to signal a clear policy intent to nudge taxpayers towards the new regime, characterised by lower rates paired with streamlined and reduced deductions. Considering this consistent trajectory, it is reasonable to anticipate further measures this year that sustain or expand these incentives, thereby consolidating the shift to the new regime.

Some of the areas that the Government may consider addressing in Budget 2026 include:

Backlog of disputed cases: As of December 31, 2024, ₹11.83 trillion (₹11.83 lakh crore) was locked in litigation for direct tax cases, with over 71,453 cases pending across the Supreme Court, High Courts and tax tribunals. Over five lakh appeals are pending before the Commissioner of Income Tax (Appeals) and the National Faceless Appeal Centre (NFAC). There is thus a pressing need for a quick redressal mechanism to facilitate the disposal of these appeals.

Requirement for a new Settlement Commission: Given the above-mentioned backlog, there is a strong case for reintroducing a Settlement Commission to resolve tax disputes quickly and fairly. The earlier Income Tax Settlement Commission ceased operations in 2021, and no new commission has been constituted for fresh filings. This is particularly important in light of the recent rise in search cases, as reflected below:

Reintroducing the Settlement Commission would help reduce pending disputes at both judicial forums and departmental levels, enable the Government to collect revenue sooner, and encourage taxpayers to come forward and rectify past non-compliance.

Board for Advance Ruling (BAR): By way of the Finance Act, 2021, the Authority for Advance Ruling (AAR) was replaced with the Board for Advance Ruling. The three-member AAR, which included a former higher judiciary member and a law member, was replaced with a two-member body comprising senior income tax officials. The new scheme also removed the binding effect of advance rulings on the Revenue and made such rulings appealable before the High Court. This has resulted in a loss of predictability and certainty, due to which companies rarely approach the BAR, rendering the forum largely otiose.

Rebuilding confidence in foreign investments: In recent years, India’s international tax landscape has increasingly been perceived as adverse to foreign enterprises, eroding the certainty required by global investors for long-term investments. Certain judicial pronouncements of the Supreme Court reinforcing this perception include:

• The Tiger Global case, where the Court held that a Tax Residency Certificate is not conclusive and may not guarantee treaty benefits.
• The expansive interpretation of Permanent Establishment in the Hyatt International case.
• The narrowing interpretation of most-favoured-nation clauses in the Nestlé case (2023).
• The cumulative impact of these rulings suggests a perceived shift away from predictability and treaty-based stability towards heightened litigation risk. This has prompted foreign investors to reassess exposure, revisit historical positions, and recalibrate structures in anticipation of increased scrutiny by the tax authorities. There is therefore a pressing need for the Government to provide much-needed clarity on tax positions affecting foreign investments.

Sanjiv Malhotra is Senior Advisor-Head of Tax Practice and Rohit Garg is Partner at law firm Shardul Amarchand Mangaldas & Co.