UNION BUDGET 2026
KEY REFORMS AND IMPLICATIONS FOR BUSINESSES

Background and Policy Context

On 1 February 2026, the Hon’ble Finance Minister of India presented the Union Budget 2026–27 (“Budget”), outlining the Government’s strategy to accelerate economic growth, strengthen domestic manufacturing, deepen capital markets and simplify regulatory compliance.

The Budget is anchored around three broad policy objectives: (i) accelerating and sustaining economic growth, (ii) fulfilling aspirations through employment and enterprise and (iii) ensuring inclusive development across regions and sectors. From a corporate and transactional perspective, the Budget combines sectoral incentives with structural reforms in tax administration, foreign investment and compliance frameworks.

The overall approach reflects a continued emphasis on ease of doing business, digitisation of regulatory processes, reduction of criminal exposure for technical non-compliances and enhanced tax certainty for both domestic and foreign investors.

Scope of Relevance for Corporations:

The announcements are particularly relevant for:

1. Indian and multinational corporate groups
2. Global capability centres and shared services operations
3. Technology, electronics, data centre and infrastructure investors
4. Listed companies and capital market participants
5. Private equity, venture capital and foreign portfolio investors
6. Micro, Small and Medium Enterprises (“MSME”) and supply-chain driven enterprises

Key measures span manufacturing incentives, infrastructure push, direct tax simplification, transfer pricing certainty and capital market liberalisation.

I. Industrial, Infrastructure and Sectoral Measures

The Budget continues the Government’s strategy of strengthening domestic production capacity and logistics infrastructure.

Key initiatives include scaling up manufacturing across identified sectors such as semiconductors, electronics components, biopharma, critical minerals and textiles, alongside support for chemical parks and industrial clusters. Public capital expenditure has been increased, with continued investments in freight corridors, inland waterways, city economic regions and multimodal connectivity.

The Budget also provides targeted incentives for strategic sectors, including data centres and digital infrastructure, as well as extended tax benefits for units operating in the International Financial Services Centre (GIFT City). These measures are expected to support long-term project development, cross-border collaborations, contract manufacturing and infrastructure-linked investments.

II. Ease of Doing Business and Direct Tax Simplification

A central theme of the Budget is the rationalisation of compliance requirements and the reduction of penal consequences for procedural defaults.

1. De-criminalisation and Procedural Rationalisation – Several offences under the direct tax framework have been recalibrated, with lower-value or technical defaults moving away from criminal prosecution towards monetary fees or graded penalties. This reduces litigation exposure and personal liability risks for management in cases involving inadvertent or minor non-compliances. Certain penalties are proposed to be converted into fixed or graded fees to bring predictability and reduce discretionary enforcement.
2. Digitisation and Streamlined Processes – The Government has proposed enhanced electronic processing across tax administration, including the electronic filing and verification of applications for lower or nil withholding tax certificates, the introduction of rule-based and automated compliance mechanisms for small taxpayers, and rationalised timelines for filing revised and updated returns. These measures are intended to reduce direct interface with tax authorities, streamline compliance procedures and improve certainty and efficiency in tax administration.

III. Accounting and Compliance Alignment

Steps have also been indicated towards harmonising tax accounting and financial reporting frameworks to reduce duplication between tax-specific standards and statutory accounting standards, thereby simplifying compliance for corporates.

IV. Capital Markets and Foreign Investment Liberalisation

The Budget seeks to deepen India’s capital markets and broaden the foreign investor base.

Individual Persons Resident Outside India are proposed to be permitted to invest in equity instruments of listed Indian companies under the Portfolio Investment Scheme with an enhanced individual limit (increased from 5% to 10% of paid-up equity capital) and a higher aggregate cap (increased from 10% to 24% of paid-up equity capital). This is expected to widen participation by overseas individual investors and improve market liquidity.

Rationalisation measures have also been introduced in securities taxation, including adjustments to securities transaction tax and changes in the taxation of share buybacks by treating consideration as capital gains. These changes may influence transaction structuring and investor returns and will require careful evaluation in deal documentation and exit planning.

V. Incentives for Digital Infrastructure and IFSC

The Government has announced a long-term tax holiday framework (till 2047) for specified data centre-related services provided through approved Indian data centres, intending to position India as a regional digital and cloud infrastructure hub.

For IFSC units and overseas banking units, the tax holiday period has been extended and concessional tax rates reduced, strengthening GIFT City’s attractiveness as a financial services and fund management centre. These measures are likely to drive inbound investment, cross-border structuring and the establishment of regional headquarters and treasury operations in India.

VI. MSME and Liquidity Measures

Targeted funds and credit support mechanisms have been introduced to strengthen MSME balance sheets and improve receivable liquidity, including enhanced use of digital receivable platforms (eg: TReDS) and credit guarantees.

For larger corporates, these initiatives may impact procurement practices, vendor financing structures and supply-chain contracting arrangements aiding timely payments to ease MSME cash flow.

Implementation and Firm Takeaway:

The Union Budget 2026 reflects a continued policy shift towards regulatory simplification, greater tax certainty and enhanced investment facilitation. From a corporate and transactional perspective, the key developments include reduced criminal exposure and procedural burdens in tax compliance, higher foreign portfolio investment limits to deepen capital markets, long-term tax incentives for data centres and IFSC operations, and sustained opportunities arising from infrastructure and manufacturing growth. Businesses should use the transition period to review their tax positions, reassess cross-border investment and holding structures, evaluate eligibility for sector-specific incentives, and strengthen internal compliance systems in light of increased digitisation and revised penalty frameworks. Early engagement with legal and tax advisors will help align structures and documentation with the evolving regulatory landscape and enable optimal use of the available benefits.