Budget 2026 could simplify income tax rules for global mergers involving Indian firms

India's economic journey since the liberalization reforms of 1991 has been marked by increasing integration with the global economy. This integration has manifested in various forms, including a significant rise in cross-border mergers and acquisitions (M&A). As Indian companies expand their global footprint and foreign entities seek to invest in the rapidly growing Indian market, the complexities of international taxation become paramount. The proposal to simplify income tax rules for global mergers involving Indian firms, potentially slated for Budget 2026, emerges from this evolving landscape, aiming to remove existing impediments and streamline cross-border transactions.

At its core, the current challenge stems from India's existing tax laws, which, in certain overseas restructurings, inadvertently create taxability for shareholders of foreign companies that hold underlying Indian assets. This means that even if a merger or acquisition happens entirely outside India between two foreign entities, if one of them has indirect ownership in an Indian company, the transaction could trigger tax liabilities for the foreign shareholders in India. This unintended taxability adds layers of complexity, cost, and uncertainty to cross-border deals, often discouraging foreign investment and making India a less attractive destination for global corporate restructuring activities. The proposed amendments aim to achieve 'tax neutrality,' meaning that such transactions, particularly those that are merely reorganizations rather than a change in ultimate economic ownership, should not attract additional or new tax liabilities in India.

Several key stakeholders are critically involved in and affected by this potential policy shift. The **Government of India**, particularly the Ministry of Finance and the Central Board of Direct Taxes (CBDT), is the primary architect of these reforms. Their objective is multifaceted: to boost foreign direct investment (FDI), improve India's 'Ease of Doing Business' ranking, and enhance the country's global economic competitiveness, while also ensuring a fair and predictable tax regime. **Indian companies** stand to gain significantly, as simpler tax rules will facilitate their global expansion, make them more attractive targets for foreign investment, and enable easier access to global capital and technology. **Foreign companies and multinational corporations (MNCs)** are perhaps the most directly impacted, as the current complexities often deter them from structuring deals involving Indian assets. Simplified rules would lower their transaction costs and risks, encouraging greater investment and collaboration. Finally, **shareholders**, especially non-resident shareholders, would benefit from reduced uncertainty and potential tax burdens, making investments linked to Indian assets more appealing.

This initiative is immensely significant for India. Economically, it can unlock greater foreign investment flows, which are crucial for capital formation, job creation, and technological advancement. By fostering a more predictable and investor-friendly tax environment, India can solidify its position as a preferred global business hub, aligning with broader policy goals like 'Make in India' and 'Atmanirbhar Bharat.' It also contributes to India's ambition of becoming a $5 trillion economy, as seamless integration into global value chains and capital markets is essential for sustained high growth. Historically, India's tax regime has evolved significantly. Post-liberalization, there have been continuous efforts to rationalize direct and indirect taxes. The infamous Vodafone tax dispute, which centered on the indirect transfer of Indian assets through an offshore transaction, highlighted the complexities and ambiguities in India's tax laws regarding such cross-border deals. While the proposed changes are not retrospective, they represent a forward-looking approach to prevent similar ambiguities and foster a more conducive environment for global capital.

From a constitutional perspective, all tax legislation in India derives its authority from **Article 265** of the Constitution, which states, 'No tax shall be levied or collected except by authority of law.' The power to legislate on income tax, excluding agricultural income, rests with the Parliament under **Article 246** read with **Entry 82 of the Union List (List I) in the Seventh Schedule**. Therefore, any amendments to simplify income tax rules would be made through changes to the **Income Tax Act, 1961**. Other relevant statutes include the **Companies Act, 2013**, which governs corporate mergers and acquisitions, and the **Foreign Exchange Management Act (FEMA), 1999**, which regulates cross-border financial transactions. The proposed changes also align with the government's broader policy thrust towards improving the 'Ease of Doing Business,' a key indicator tracked by the World Bank, and attracting Foreign Direct Investment (FDI).

Looking ahead, the successful implementation of these simplified rules in Budget 2026 could usher in a new era of increased cross-border M&A activity involving Indian entities. It would send a strong signal to the global investment community about India's commitment to creating a transparent, stable, and competitive tax regime. This could lead to a virtuous cycle of higher FDI, technology transfer, and greater integration of Indian businesses into global value chains. Furthermore, it might prompt a continuous review and adaptation of India's tax laws to keep pace with global best practices and emerging economic realities, ensuring that India remains an attractive and dynamic player in the international economic arena.