OPINION | Union Budget signals fiscal prudence and growth-oriented reforms

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The Union Budget reinforces fiscal consolidation through disciplined deficit targets and higher capital expenditure. Targeted tax reforms support infrastructure-led growth, boost manufacturing competitiveness, expand services, and strengthen the financial sector

The first Union Budget of the second quarter of the 21st century indicates the government’s vision to continue on the path of fiscal prudence. As presented by the Union Finance Minister, the Revised Estimates of the fiscal deficit for 2025–26 have been estimated at par with the Budget Estimates for 2025–26 at 4.4 per cent of GDP. In line with the new fiscal prudence path of debt consolidation, the fiscal deficit in 2026–27 (BE) is estimated to be 4.3 per cent of GDP.

It is proposed to increase the Central Government’s capital expenditure (capex) for the financial year 2026–27 to ₹12.2 lakh crore, which is around 9 per cent over the current year’s budgetary proposal of ₹11.2 lakh crore. The government will continue to focus on infrastructure creation in cities with populations of over five lakhs, including tier-2 and tier-3 cities that have expanded into key growth centres. Several initiatives have been announced to strengthen infrastructure, which aligns with ASSOCHAM’s pre-Budget submission that underlines the importance of prioritising high-quality capital expenditure in logistics, transport, etc., to sustain productivity-driven growth.

Financial Sector

While India’s financial system is becoming more resilient, diversified, and inclusive, it faces new challenges emanating from dynamic forces. To continue on the path of reform-led growth of this sector, a High-Level Committee on Banking for Viksit Bharat has been proposed to be set up to comprehensively review the sector and align it with India’s next phase of growth, while safeguarding financial stability, inclusion, and consumer protection.

A comprehensive review of the Foreign Exchange Management (Non-Debt Instruments) Rules to create a more contemporary, user-friendly framework for foreign investments, consistent with India’s evolving economic priorities, has also been proposed in the Union Budget this year.

Taxation Prudence

Uncertainties over future tariff trajectories will govern the magnitude and scope of trade policy shifts going forward. However, the measures with respect to taxation are expected to provide the much-required impetus to accelerate economic momentum.

As a step towards strengthening tax administration, the Budget proposes the constitution of a Joint Committee of the Ministry of Corporate Affairs and the Central Board of Direct Taxes for incorporating the requirements of the Income Computation and Disclosure Standards (ICDS) into the Indian Accounting Standards (Ind AS) itself.

A scheme for small taxpayers is proposed wherein a rule-based automated process will enable obtaining a lower or nil deduction certificate instead of filing an application with the assessing officer.

Moreover, in a key change to the Minimum Alternate Tax (MAT) regime, it is proposed to make MAT a final tax. Accordingly, there will be no further credit accumulation from 1 April 2026. The rate of final tax will be reduced to 14 per cent from the current MAT rate of 15 per cent.

Tax Reforms to Boost the Manufacturing Sector

ASSOCHAM proposed providing time-bound support to export sectors facing global tariff or demand shocks, while improving cash flows and trade competitiveness.

The Union Budget proposes to increase the limit for duty-free imports of specified inputs used for processing seafood products for export from the current 1 per cent to 3 per cent of the FOB value of the previous year’s export turnover. Further, duty-free imports of specified inputs are extended to exports of shoe uppers in addition to leather or synthetic footwear. An extension of time for the export of the final product from the existing six months to one year has been proposed for exporters of leather or textile garments, and leather and synthetic footwear.

Tax Reforms to Boost the Services Sector

The services sector has emerged as the star performer of the Indian economy, and several initiatives have been taken to support its growth momentum. The Union Budget provides for the clubbing of services under a single category of information technology services with a common safe-harbour margin of 15.5 per cent.

A provision of tax holidays until 2047 for foreign companies providing cloud services to global customers through India-based data-centre services has been outlined. Additionally, related entities providing data-centre services from India will receive a safe-harbour margin of 15 per cent on cost.

At this pivotal moment in the journey towards Viksit Bharat, taxation choices are evolving based on emerging requirements. At the same time, India’s fiscal dynamics remain healthy, supported by sustained improvements in the quality of spending, with higher allocations for capital expenditure and a continued commitment to fiscal consolidation.

Courtsey To : Moneycontrol