Union Budget 2026: M&A Tax Concerns

Tax clarity has become just as important as tax rates as India attempts to maintain transaction momentum in the face of global uncertainties.

Tax certainty and deal momentum ahead of Budget 2026

Budget 2026 coincides with a period in the M&A ecosystem where tax certainty, dispute risk, and execution timeliness are progressively influencing deal structuring. Therefore, the Budget offers a chance to address problems that still affect transaction activity.

It is crucial that the government give clarification, especially about the outcome of previous litigation and completed transactions, as taxpayers and advisors get ready for the environment after the Supreme Court’s Tiger Global ruling. Guidance on the General Anti-Avoidance Rule’s (GAAR) applicability will help lower confusion and potential litigation, particularly for grandfathered investments made prior to April 1, 2017.

GAAR clarity and legacy transaction concerns

In order to speed up demergers and intra-group and smaller restructurings, Section 233 of the Companies Act was created. Despite being expedited, these demergers still need to be filed with the regulator and complied with. The government claims that because fast track demergers are not subject to court oversight and may lead to tax evasion, they are not revenue neutral.

The fast-track option loses its commercial significance if demergers are not tax neutral. Clear valuation standards could allay revenue concerns, and GAAR could assist in resolving any avoidance agreements. This would bring tax policy into line with the declared goal of making doing business easier.

Tax neutrality and fast-track demergers

It would be appropriate to extend the benefit of carryover of losses in the case of mergers of service sectors and not limit it to manufacturing, hotels, or industrial ventures, given the growing relevance of the service sector in India’s growth story. Global competence centers (GCC) in India benefit from tax certainty, which supports a strategic growth engine.

GCCs in India have been expanding quickly as a result of numerous multinational corporations establishing their GCCs there because of the country’s affordable skilled labor, ease of communication, political stability, and business-friendly atmosphere.

Supporting service-sector mergers and GCC growth

A number of tax issues, including permanent establishment (PE) concerns, become pertinent as GCCs expand. It would be beneficial if the government established some safe havens from PE regulations, particularly with regard to cross-border secondments and compensation for the GCCs, such as the implementation of tax breaks for GGCs, data centers, etc.

Permanent establishment risks and safe harbors

Indian companies are expanding their investor base and global reach. Even in cases where there is no monetization, outbound mergers—in which an Indian company joins an international one—often have direct tax ramifications. The government’s neutrality on outbound mergers and corporate combinations has long been a desire of the tax community.

Although there are clauses that exempt inbound mergers, unclear outbound merger regulations have frequently made it difficult for Indian businesses to expand outside.

Outbound mergers and global expansion hurdles

Additionally, tax neutrality is dubious in the event of overseas mergers, especially with completely owned subsidiaries, because it is nearly hard to satisfy the requirement of issuing shares to oneself. Domestic mergers already have this requirement loosened.

In addition to a shareholder-level exemption in cases where overseas mergers indirectly result in the transfer of Indian shares, a similar relaxation should be applied to such mergers.

Share issuance challenges in overseas mergers

Since it can occasionally be challenging to match the market price, particularly when there is a delay between signing and closing the transaction, taxpayers would also anticipate clarifications on safe harbors for purchasing listed companies through the off-market process from the trigger of Section 56(2)(x) of the Income-tax Act, 1961.

Furthermore, rationalizing the present 36-month holding period for slump sales—as opposed to 12 or 24 months for the majority of asset classes—might be a positive move.

Valuation safe harbors and slump sale reforms

Furthermore, taxation of contingent consideration would be more in line with the business reality of milestone-based M&A transactions if it were made clear that sums such as capital gains would only be taxed upon actual crystallization rather than upfront at close.

Targeted interventions in these areas might significantly improve corporate sentiment, reduce conflicts, and facilitate transaction activity that supports economic growth as Budget 2026 approaches.

Frequently asked questions

1. For M&A in 2026, why is tax transparency more crucial than tax rates?

Investors place a premium on predictability in an uncertain global climate. Clarity is just as important as competitive tax rates because ambiguity regarding GAAR, legacy issues, and transaction taxability raises execution risk, slows deal closes, and frequently results in valuation reductions.

2. How will the Tiger Global decision by the Supreme Court affect previous and upcoming agreements?

The ruling has raised new concerns about the application of GAAR and retrospective review. Taxpayers confront uncertainty regarding completed transactions and ongoing legal risk in the absence of clear government direction, particularly for grandfathered pre-2017 investments.

3. For fast-track demergers, why is tax neutrality crucial?

Even though Section 233 makes demergers faster, the process is not commercially appealing if tax neutrality is denied. Adopting valuation checks and using GAAR to prevent abuse would improve ease of doing business while balancing worries about revenue.

4. What tax changes are required to help the GCCs and India’s growth driven by services?

India’s position as a global capacity hub would be strengthened and cross-border tax friction would be lessened with clear PE safe harbors for cross-border secondments, certainty on salary taxation, and concessional regimes for GCCs and data centers.

5. What adjustments would allow Indian businesses to expand internationally?

Global restructuring would be greatly facilitated by offering tax neutrality for outbound mergers, easing unworkable share-issuance requirements in international mergers, exempting indirect transfers at the shareholder level, and coordinating capital gains taxation with actual monetization.

Conclusion

Budget 2026 offers a crucial chance to transition from reactive tax administration to proactive tax policy as India looks to maintain robust M&A momentum in the face of global turbulence.

Targeted reforms can significantly lower conflicts, speed up deal execution, and boost investor confidence. These reforms range from GAAR clarification and demerger neutrality to GCC certainty and outbound merger relief.

The government can strengthen India’s standing as a top location for both local consolidation and international expansion by bringing tax laws into line with business realities.