Budget 2026: Simpler tax laws may lift FDI flows; experts flag capital cost relief

The Union Budget should prioritise simpler and more predictable tax laws, alongside tax neutrality for cross-border and corporate reorganisations, to strengthen India’s appeal as a long-term destination for foreign direct investment (FDI), tax and economic experts said, reported PTI.

They argued that rationalising the tax framework and lowering the cost of capital would complement ongoing reforms and help attract sustained foreign capital inflows, even as global investment conditions remain uncertain.




Rudra Kumar Pandey, Partner at Shardul Amarchand Mangaldas & Co, said the forthcoming Budget offers an opportunity to recalibrate the tax system in a way that supports growth while removing long-standing structural hurdles to investment and corporate restructuring.

“The forthcoming budget presents an opportune moment for policymakers to recalibrate the tax framework in a manner that fosters growth, rewards compliance, and enhances the purchasing power of the citizenry—whilst simultaneously addressing long-standing structural impediments to corporate reorganisations and investment flows,” Pandey said, PTI quoted.

He added that a structurally lower cost of capital—backed by credible fiscal consolidation, deregulation and tax clarity—would deepen private investment and make India more attractive for stable FDI and portfolio inflows than incremental liberalisation alone.

Pandey also flagged a gap between corporate law reforms and tax treatment. While the Companies Act now allows a wider range of fast-track mergers and overseas holding company reorganisations from September 2025, similar tax neutrality has not been extended to fast-track demergers.

“Extending tax-neutral treatment to fast-track demergers would ensure that the procedural efficiencies achieved under corporate law are not nullified by adverse tax outcomes,” he said.

On sectoral opportunities, Pandey noted growing foreign investor interest in India’s defence ecosystem, driven by higher procurement outlays, export momentum and co-development opportunities under Atmanirbhar Bharat. Rather than raising FDI caps, he suggested removing specific regulatory bottlenecks. He also said foreign investors remain keen on India’s fast-growing e-commerce sector, given the scale of the digital consumer base and its role in supporting exports and MSMEs.

Rumki Majumdar, Economist at Deloitte India, said India’s efforts to diversify trade markets could aid foreign investment, but stronger execution is needed.

To improve FDI inflows, she said India must enhance the utilisation of free trade agreements, which would require further progress on ease of doing business, better logistics and competitiveness, and a continued focus on skilled talent availability.

“To move up the value chain, India will need investment in advanced manufacturing, such as semiconductors, pharma, heavy machinery, clean energy, battery storage, and grid modernisation,” Majumdar said, identifying these as key sectors where foreign investment will be crucial to meet rising demand.