I. Tax Incentives for Corporates

1. Boost for Exports and Global Capability Centres (GCCs): The government is expected to introduce tax benefits aimed at corporates engaged in the export of goods and services, as well as GCCs. These measures would enhance India’s competitiveness in global markets.
2. Extension of Concessional Tax Rates: To further incentivize manufacturing, the concessional corporate tax rate of 15% for new manufacturing units should be extended until March 2026. Coupled with the Production Linked Incentive (PLI) scheme, this would provide a significant boost to domestic production capabilities.
3. Facilitating Reverse Flipping: Indian companies with foreign headquarters are increasingly considering reverse flipping their structures or merging with Indian entities. Specific amendments to Section 47(vii) and Section 2(1B) of the Income Tax Act are necessary to exempt such mergers, facilitating smoother transitions.
4. Capital Incentives for Manufacturing: Providing capital incentives such as additional depreciation and investment allowances would further energize the manufacturing sector, encouraging long-term investments.
5. Incentives for Job Creation: Although Section 80JJAA exists, its effectiveness in practice is limited. Reforms to make this provision more impactful in creating employment are highly anticipated.

II. Reduction of Litigation and Efficient Tax Administration

1. Independent Tax Dispute Resolution: The introduction of an independent tax dispute resolution mechanism, including negotiated tax settlements, would be a welcome move. Such measures would reduce litigation and provide clarity for taxpayers.
2. Flexible Dispute Resolution Schemes: The existing tax dispute resolution schemes, while beneficial, have not achieved their full potential. Allowing partial settlements of issues and making these schemes more flexible would encourage wider adoption.
3. Streamlining Advance Ruling Processes: The advance ruling mechanism should be streamlined, ensuring faster and more efficient delivery of rulings.
4. Enhancing APA Panels: The Advance Pricing Agreement (APA) regime provides certainty in transfer pricing. However, delays in rulings have been a persistent issue. Increasing the number of APA panels across the country is essential.
5. Comprehensive Tax Commentary: Issuance of commentaries and clarifications on key sections of the Income Tax Act, akin to practices by the US IRS or OECD, would prevent ambiguities and reduce litigation. This could be part of a larger direct tax law review.
6. Rationalization of Section 56(2)(x): Removing the applicability of Section 56(2)(x) on shares and securities would encourage mergers and acquisitions (M&A), driving business consolidation and growth.
7. TDS Rationalization: Rationalizing Tax Deducted at Source (TDS) rates to a uniform rate for residents would simplify compliance. Additionally, eliminating overlaps of TDS and Tax Collected at Source (TCS) and reducing the royalty and fees for technical services rate are critical reforms.

III. Tax Incentives for Individuals

1. Revising the Highest Tax Slab: Increasing the threshold for the highest tax rate of 30% to taxable income exceeding INR 50 lakh would leave more disposable income in the hands of taxpayers, potentially boosting consumption and economic growth.
2. Removal of Surcharge: Eliminating surcharge on higher income slabs would make the tax structure simpler and less burdensome.
3. TDS Exemptions for Individuals: Abolishing TDS for individual taxpayers and shifting the recovery mechanism to advance tax or self-assessment tax would simplify compliance for individuals.
4. Enhancements to the New Tax Regime: To encourage adoption of the new tax regime, introducing deductions for interest on housing loans would make it more appealing to taxpayers.

IV. Sector-Specific Expectations

Information Technology (IT) :

• The IT sector seeks clarity on transfer pricing regulations to avoid prolonged litigation.
• Tax exemptions on export income for smaller IT firms could enhance global competitiveness.
• Special incentives for investments in emerging technologies such as AI, blockchain, and cybersecurity are critical to maintaining India’s technological edge.
• Tax benefits for software product development and government-supported incubation centers for tech start-ups would bolster innovation.

Pharmaceuticals :

• Tax incentives for R&D spending are essential to promote innovation and ensure global competitiveness in drug development.
• Special schemes for capital investments in API (Active Pharmaceutical Ingredient) manufacturing would reduce dependency on imports.
• Additional tax deductions for exports, especially for vaccines and essential drugs, could boost India’s position as the “pharmacy of the world.”
• Reforms to expedite patent approval processes with tax-linked benefits for patent filings are anticipated.

Start-ups :

• Extension of the tax holiday under Section 80-IAC and relaxation in compliance norms, especially for angel tax provisions, would provide relief to start-ups.
• Relaxation in shareholding requirements under Section 79 to carry forward losses would encourage entrepreneurship.
• Introduction of seed capital tax benefits and funding support programs would aid early-stage ventures.
• Simplifying ESOP taxation to ensure employees can exercise options without immediate tax burdens would attract top talent to start-ups.

Real Estate :

• Increase in the tax deduction limit for home loan interest is essential to boost housing demand.
• Extension of tax incentives for affordable housing projects under Section 80-IBA would help address housing shortages.
• Reducing the holding period for long-term capital gains on property from two years to one year would encourage property transactions.
• GST rate rationalization for under-construction properties could incentivize buyers and drive sales in the sector.

Manufacturing :

• Extension of the Production Linked Incentive (PLI) scheme to additional sectors, especially renewable energy and electric vehicles, would encourage investment and innovation.
• Tax rebates or concessions for adopting advanced manufacturing technologies like Industry 4.0 and automation could enhance productivity.
• Introducing sector-specific tax incentives for labor-intensive manufacturing industries like textiles and apparel would support employment generation.
• Expedited GST refunds for exporters and manufacturers would improve working capital availability, boosting operational efficiency.
• Special tax benefits for green manufacturing initiatives aimed at reducing carbon footprints would align with India’s sustainability goals.

V. Conclusion

The Union Budget 2025-26 represents a pivotal opportunity for the government to address key tax-related challenges and opportunities. By focusing on corporate incentives, simplifying tax administration, and providing tangible benefits to individual taxpayers, the Finance Minister can lay the foundation for a robust and inclusive economic growth trajectory. The inclusion of sector-specific measures would further strengthen industries like IT, pharmaceuticals, start-ups, real estate, and manufacturing, ensuring sustained development across the board. As industries, businesses, and individuals await the announcements, the onus lies on the government to deliver a balanced and forward-looking budget that meets the aspirations of all stakeholders.

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