With the simplification exercise of the Income -tax Act (Act) already completed, Corporate India has a lot of expectations from Union Budget 2026 to make key policy and substantive changes. There is a need for easing compliance burden, strengthening the dispute resolution framework and providing clarity on various issues where ambiguities and interpretational challenges could brew litigation in coming years.
Though the wish list is long, some of the key items which merit urgent attention are:
- Revamping the Tax deduction at source (TDS) regime: While the new Act has tabulated all the TDS provisions, making it easier for taxpayers to locate and refer to the correct section, the structural reforms in TDS framework are still awaited.
TDS compliances drain a lot of resources. It is time that this regime gets a complete makeover. Rethink is required on the foundational aspects, namely, if there is still a need for TDS to be used as a primary source of establishing transaction trails. Due to technological developments and digitisation of the Indian economy, it may be evaluated if the GST framework is now more suited to take up this responsibility.
The information exchange between the different departments and extent of reporting under the Statement of Financial Transaction Framework (SFT) framework also supports the idea that there are other alternatives which can support this transition. TDS could now be used to establish transaction trail, as a backstop, only in cases where transaction trail is not available from these sources.
Further, not all TDS sections garner significant resources for the government. Thrust should be to identify and retain those key TDS sections i.e. where collections are high. The ones which have a miniscule contribution to the overall kitty, could either be deleted or merged.
Multiplicity of TDS rates also creates confusion. Currently there are rates ranging from 0.1% to 35%. It is desirable that only 2-3 rates are considered. Also, the requirement to issue TDS certificates could be dispensed with, considering the information is already available in form 26AS and Annual Information Statement (AIS). These measures will help reduce compliance burden on taxpayers and mitigate litigation on interpretation issues including application of correct rates.
- Dealing with pendency at Commissioner of Income tax (CIT(A)): Tax dispute resolution remains a pressing challenge and stronger measures are required for timely closure.
The taxpayer aggrieved with an assessment order files an appeal before the CIT(A), being the first appellate authority. As per some recent reports, as of 31 March 2025 around 5.39 lakh appeals are pending before CIT (A), with the disputed amount of INR 16.7 lakh crore. These numbers highlight the magnitude of the issue.
There is a need for a stricter mandate to dispose of the appeal within prescribed timelines provided under Act. This would help reduce litigation cost, ensure timely resolution and unclog the system. It is equally important to assess the address of the resource gap in the tax department, which leads to delays, despite genuine intent to address these challenges.
- Detailed guidance on General Anti Avoidance Rule (statutory GAAR): With the GAAR panel being operational, we are likely to see more cases where statutory GAAR is invoked by the tax department. With this emerges the need for detailed guidance on every facet of statutory GAAR. Most of the mature GAAR jurisdictions provide detailed guidance on how statutory GAAR would apply in different scenarios. This guidance is also regularly updated. It helps the taxpayers to have a better understanding of what to stay away from to avoid tax controversies.
Statutory GAAR in India can be invoked if main purpose of the arrangement is to obtain tax benefit and one of the four tainted element tests is met. These tests are commercial substance test, misuse or abuse test, arm’s length test and bona fide purpose test.
While the Act provides some guidance on how to construe when an arrangement “ lacks commercial substance”, but detailed guidance on other three tainted elements is needed. Similarly, guidance is needed on how the main object of an arrangement is to be ascertained, in cases there are multiple objects. How to address a situation when some of the objectives cannot be quantified? Case studies would surely help.
It is also desirable that clarity be provided on whether judicial anti-avoidance principles (judicial GAAR) continue to apply alongside codified statutory GAAR. One of the key rationales of introduction of statutory GAAR was to codify the doctrine of substance over form, laid down by courts. Hence, parallel application of this doctrine, now when statutory GAAR is operational may not be warranted.
In recent past there has been uptick of litigation on the interplay between statutory GAAR and judicial GAAR. It is also important to note that while statutory GAAR has tax thresholds, grandfathering provisions and requirement of referral to GAAR panel, there are no such limitations in case of judicial GAAR. Hence, this issue needs to be suitably addressed.
Also, while the Act lays down a detailed procedure of referral to the GAAR panel for invocation of statutory GAAR, this avenue is not available when the Principal Purpose Test (PPT) is invoked to deny tax treaty benefit. Application on PPT on a taxpayers’ case also requires the same degree of care as invocation of statutory GAAR. Hence, it is desirable that GAAR panel route is also prescribed for such cases.
To conclude, there is a lot of expectation that the government will look at these critical concerns of taxpayers and suitably address them in the upcoming Budget.
This article first appeared in the Moneycontrol on 26 December 2025.
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