9 Budget boosts for businesses: Tax holidays lengthen, penalties soften, compliance made easy

A set of proposed changes to direct tax laws in Budget 2026 aim to reduce litigation, bring greater certainty to long-running disputes and make compliance less punitive for taxpayers, while extending incentives for financial services and digital infrastructure. Retaining the government’s stated focus on a more facilitative tax regime, the measures touch a wide host of aspects from revised returns and reassessment proceedings to tax prosecution and buybacks. Here's a detailed look:

1. The time limit for filing a revised return of income is proposed to be extended up to March 31, subject to payment of a small fee. This gives taxpayers additional time to correct errors or omissions, improving the accuracy of filings and lowering the scope for future disputes with the tax department.

2. The framework for filing updated returns has been further liberalised. Taxpayers will now be allowed to file an updated return even if it results in a reduction of declared tax losses. Importantly, the Budget also proposes to permit filing of an updated return even after the issuance of a reassessment notice, provided an additional tax of 10% is paid. This is aimed at encouraging voluntary compliance and early closure of cases.


3. Relief has been provided to employers on deductions relating to employee contributions to statutory funds such as provident fund and ESIC. Until now, companies could claim a deduction only if employee contributions were deposited with the relevant authorities within prescribed timelines. The proposal allows the deduction if such contributions are paid up to the due date of filing the income tax return. This brings employee and employer contributions to statutory funds at par and reduces disallowances arising from procedural delays.

4. Units operating in International Financial Services Centre (IFSC) are set to benefit from a significant extension of tax incentives. The tax holiday on income is proposed to be expanded from 10 years out of a 15-year window to 20 years out of a 25-year window. After the holiday period ends, such income will be taxed at a concessional rate of 15%, strengthening India’s pitch to global financial players.

5. A long-standing controversy around reassessment notices is sought to be settled. With retrospective effect, the government has clarified that notices issued by jurisdictional tax officers (JTOs), even instead of faceless tax officers (FTOs), will be valid. This move is expected to settle a large number of pending cases where reassessment proceedings were challenged on procedural grounds.

6 Tax prosecution provisions have been rationalised. Rigorous imprisonment has been replaced with simple imprisonment, and the maximum term has been reduced to two to three years from the earlier seven years. Several offences have been decriminalised altogether, with monetary fines proposed instead. The shift reflects an attempt to boost compliance through deterrence without criminalisation.

7. Penalties for procedural delays are also being made more predictable. Delays in getting books audited, late filing of transfer pricing reports or failure to furnish statements of transactions earlier attracted penalties at the discretion of tax officers. Under the proposed changes, such defaults will now attract fixed fees linked to the period of delay, reducing uncertainty and discretion.

8 In a boost to the digital and data infrastructure ecosystem, a foreign company availing services from data centres in India and providing services to Indian users through Indian resellers will be eligible for a tax holiday up to March 31, 2047. The measure is aimed at encouraging global technology companies to use India-based data centres without triggering immediate tax costs.

9 The tax treatment of share buybacks is also set to change. Currently, consideration received on buyback of shares is taxed as dividend, while the cost of extinguished shares is allowed separately as a capital loss. The proposal seeks to instead tax capital gains arising from buybacks directly in the hands of shareholders, simplifying the structure and aligning taxation more closely with economic outcomes.

Taken together, the new proposals have signalled a continued shift towards a less adversarial tax regime, with greater emphasis on certainty, time-bound compliance and long-term incentives for priority sectors, even as the government tightens rules to close gaps and streamline taxation of financial transactions.


**Based on analysis done by EY for Times News Network