Budget 2026: Key expectations in the M&A tax space

Tax neutrality in fast-track demergers

Most jurisdictions take the policy position that imposing tax on corporate reorganisations is economically inefficient, as doing so would deter businesses from undertaking such transactions. Where shareholders maintain their interest in the company and business operations continue, a corporate reorganisation may be viewed as merely a change in the legal form of an existing enterprise rather than a substantive shift in economic circumstances warranting taxation. India also accords tax neutrality to demergers and amalgamation on meeting certain conditions that are predicated around continuity of interest and continuity of business. However, Indian income tax law is yet to extend such tax neutrality to the newly introduced fast-track demergers. This asymmetry leaves companies with no choice but to revert to lengthier tribunal routes simply to secure tax neutrality, rendering fast-track demergers otiose. Union Budget 2026 must address this lacuna, ensuring procedural streamlining for value enhancing corporate reorganisations is not undermined by unfavourable tax implications.

Clarity on tax treatment of earn-outs

With the proliferation of performance-linked deal structures, earn-outs and deferred contingent consideration have become integral to mergers and acquisitions, particularly within the startup and technology sectors. However, the timing of taxation of earn-outs, being contingent payments, remains ambiguous under prevailing law. The judiciary has delivered conflicting rulings on whether tax liability relates back to the year of transfer or arises only in the year of accrual. This uncertainty has a distortionary impact on deal structures. Investors and promoters alike face considerable compliance complications, whilst acquirers grapple with withholding tax obligations on payments whose taxability remains contested. The Budget should clarify that earn-outs should only be taxable in the year of accrual.

Loss carry-forward for bona fide restructurings

The provisions disallowing carry-forward and set-off of brought-forward business losses upon a change in shareholding beyond prescribed thresholds have long been a point of friction in dealmaking. While designed as an anti-abuse measure, these rules inadvertently penalise bona fide domestic group reorganisations where ultimate economic ownership remains unchanged. The absence of a statutory definition of “beneficial ownership” has spawned divergent judicial views and protracted litigation on whether continuity at the ultimate parent level suffices.

For corporate groups undertaking internal restructurings, this creates genuine commercial uncertainty; losses accumulated over years may be forfeited despite no change in ultimate control. An explicit exemption for domestic group restructurings where ultimate beneficial ownership continues unchanged would align India with international practice. Clear conditions, a statutory definition tied to ultimate parent or controlling shareholders, a minimum continuity threshold, a continuity-of-business test, and ring-fencing of pre-reorganisation losses, would provide bright-line rules, facilitate efficient restructurings, and reduce litigation.

Gift tax for shares

The provision taxing the difference between fair market value (FMV) and acquisition price of shares as income from other sources was conceived as a Specific Anti-Avoidance Rule (SAAR) targeting a specific mischief: the laundering of unaccounted income through undervalued transactions. In

practice, however, this SAAR has strayed far from its intended purpose. In commercial dealmaking, this creates a problem. Share prices fluctuate daily, distressed sellers accept discounts reflecting their circumstances, and arm’s length negotiations between unrelated parties may legitimately yield prices below FMV. This one-size-fits-all approach fails to distinguish between genuine tax mischief and legitimate market-driven pricing. A provision designed to curb specific abuses has become an omnibus tax on bargain purchases, penalising ordinary commercial conduct. In the context of buyers acquiring listed shares in off-market deals, the FMV has been pegged to the trading price of the stock as on the date of closing. Such price is impossible for parties to predict on the date of the agreement, yet the acquirer faces tax exposure to buyers on any upswing in price between signing and closing. Budget 2026 must introduce appropriate safeguards to restore this SAAR to its intended scope.

Clarity on tax treaty benefits in cross-border M&A

Union Budget 2026 will be presented fresh on the heels of the Tiger Global ruling. There are several observations in the ruling that create ambiguity around legal standards to be applied for determining entitlement to tax treaty benefits. For instance, the ruling suggests tax residency in a jurisdiction may be challenged if the investor does not pay taxes in the country of residence. It also casts a shadow on application of Article 13 (capital gains) under tax treaties to indirect transfers. While the requirement to have genuine substance in holding company structures to access tax treaty benefits is well noted, legislative intervention or a circular to set out clear legal standards to give reassurance on some of these issues (that go beyond substance) will assist in restoring tax certainty and investor confidence.

(Puri is a Partner at Shardul Amarchand Mangaldas & Co; Tiwari is an Associate at Shardul Amarchand Mangaldas & Co. Views are personal.)