Budget 2026: The missing tax framework for India’s outbound M&A wave

India's economic narrative has largely been dominated by its attractiveness as a destination for Foreign Direct Investment (FDI). However, a significant shift is underway, with Indian corporates increasingly looking beyond national borders for growth, technology acquisition, and market expansion through outbound Mergers & Acquisitions (M&A). This strategic pivot, while indicative of India's growing economic prowess and global ambitions, is currently facing friction due to an outdated tax and regulatory framework. The call for reforms in Budget 2026 highlights a critical juncture where policy needs to catch up with corporate dynamism.

Historically, India's economic policy, particularly after the liberalisation reforms of 1991, focused on attracting foreign capital and technology to fuel domestic growth. Regulations like the Foreign Exchange Regulation Act (FERA) of 1973 were restrictive, limiting capital outflows. The subsequent enactment of the Foreign Exchange Management Act (FEMA) in 1999 marked a significant policy shift towards facilitating cross-border transactions, including outbound investments, albeit with certain limits and approvals. Over the past two decades, Indian conglomerates like Tata Group, Reliance Industries, and Adani Group have made significant global acquisitions, demonstrating the potential and ambition of Indian businesses on the world stage. This trend is driven by several factors: the need for advanced technology, access to new markets to diversify revenue streams, securing raw material supplies, and enhancing global competitiveness.

Currently, the primary concern is that the existing tax and regulatory regime creates undue hurdles for Indian companies pursuing overseas M&A. Specific areas needing reform include clearer tax deductions on interest paid for overseas borrowings used to fund acquisitions. Ambiguities here can lead to increased tax liabilities and discourage investment. Another critical demand is for 'tax neutrality' for overseas mergers. This means that a cross-border merger should ideally not trigger additional tax burdens beyond the economic rationale of the deal itself. Without tax neutrality, companies face double taxation or other punitive levies, making such transactions less attractive. Furthermore, the expansion and strengthening of India's Double Taxation Avoidance Agreement (DTAA) networks are crucial. DTAAs are bilateral agreements aimed at preventing the same income from being taxed twice – once in the country of origin and again in the country of residence. A robust DTAA network simplifies international taxation and boosts investor confidence.

Key stakeholders in this evolving landscape include the Indian Corporates themselves, who are the direct beneficiaries and drivers of these outbound investments. Their global competitiveness and profitability are directly impacted by the tax framework. The Ministry of Finance, particularly the Department of Revenue, is a pivotal stakeholder, responsible for formulating tax policies, negotiating DTAAs, and presenting the Union Budget. The Reserve Bank of India (RBI) plays a crucial role in regulating foreign exchange transactions and capital account management, ensuring financial stability while facilitating legitimate outflows. Tax consultants, legal firms, and industry associations also play an important role in advocating for these reforms, providing expert analysis and representing corporate interests.

This issue holds immense significance for India. Economically, a streamlined framework for outbound M&A can accelerate the growth of Indian multinationals, leading to increased revenue, technological advancement, and potentially, job creation within India through enhanced domestic capabilities. It also strengthens India's position in the global economy, transforming it from merely an investment destination to a significant capital exporter. Politically, a robust global presence of Indian firms enhances India's soft power and diplomatic influence. From a broader economic perspective, facilitating outbound M&A aligns with the 'Make in India' and 'Atmanirbhar Bharat' initiatives by allowing Indian companies to acquire critical technologies and global supply chain linkages that can ultimately bolster domestic manufacturing and innovation. These reforms also contribute to improving India's 'Ease of Doing Business' ranking, making it a more attractive hub for global operations.

From a constitutional perspective, the power to levy taxes in India is derived from **Article 265**, which states that no tax shall be levied or collected except by authority of law. The specific legislative power for income tax lies with the Union Parliament under **Article 246** and Entry 82 of the Union List (Seventh Schedule), which covers "Taxes on income other than agricultural income." The **Income Tax Act, 1961**, is the primary legislation governing taxation, including provisions related to international taxation and the implementation of DTAAs. The **Foreign Exchange Management Act (FEMA), 1999**, governs all foreign exchange transactions, including outward remittances and investments. The annual Union Budget is the legislative instrument through which tax policies and amendments to these acts are proposed and implemented.

Looking ahead, the future implications are substantial. A progressive and clear tax framework is likely to unleash a new wave of outbound M&A, propelling Indian firms into the league of global leaders. This could lead to greater integration of India into global value chains, fostering technological leapfroogging and diversification of economic risk. However, the government will need to carefully balance the need to facilitate outbound investments with domestic revenue considerations and guard against potential tax avoidance. Furthermore, as global tax norms evolve, particularly with initiatives like the OECD's Base Erosion and Profit Shifting (BEPS) framework, India's policies will need continuous adaptation to remain competitive and compliant with international standards. The Budget 2026 proposals will thus be a crucial indicator of India's commitment to supporting its global corporate champions and solidifying its position as a major economic power.