Context and Objectives of a Pre-Budget Memorandum
A pre-budget memorandum is a structured channel through which professional bodies, businesses and policy analysts convey diagnostics and proposals to the government ahead of the Union Budget. By 2026, three themes sit at the heart of this dialogue: the need to widen the tax base, the challenge of sophisticated tax avoidance, and the burden of prolonged tax litigations.
The objective is not merely to seek concessions, but to recommend a balanced framework: a broad, fair tax base; effective yet proportionate anti-avoidance tools; and a litigation architecture that is predictable, time-bound and technology-enabled. A credible memorandum ties these strands together into a long-term design, rather than a set of isolated budget-year demands.
The Tax Base: Narrow, Skewed and Vulnerable
Despite sustained growth in nominal GDP and visible formalization in parts of the economy, the number of effective direct taxpayers remains narrow relative to the workforce and consumption patterns. A relatively small cohort of individuals and corporates contributes a disproportionately large share of direct tax revenues.
This concentration makes the system vulnerable to cyclical downturns and sectoral shocks. It also fuels a perception of inequity among compliant taxpayers, and encourages dependence on indirect taxes which are inherently regressive. A pre-budget strategy must therefore focus on broadening the base in a way that is sustainable, administratively feasible and socially legitimate.
Structural Issues in the Current Tax Base
Several structural factors constrain base expansion:
• High informality: Large segments of labour and micro enterprises remain outside
the formal tax net, resulting in income that is neither reported nor captured in information
systems.
• Fragmented registration and reporting: Different registrations across tax and
regulatory frameworks are not always harmonized, creating blind spots and opportunities for
under-reporting.
• Under-utilization of data: While data is now collected from many sources, it is
not fully leveraged for risk-based outreach, nudging and enforcement.
• Thresholds and exemptions: Well-intentioned thresholds and exemptions can, if not
periodically reviewed, create permanent pockets of income that escape taxation without strong
policy justification.
These issues mean that base widening cannot be achieved simply by lowering thresholds or increasing rates; deeper system design is required.
Strategies for Sustainable Tax Base Expansion
Sustainable base expansion combines technology, law design and behavioural insights:
• Integrated information systems: Linking direct tax, indirect tax, financial and
regulatory data to identify potential taxpayers and patterns of under-reporting, while respecting
privacy and due process.
• Simplified regimes for smaller taxpayers: Presumptive or graded regimes with
minimal record-keeping for micro and small enterprises, encouraging them to enter and remain within
the formal system.
• Voluntary compliance and nudges: Pre-filled returns, soft reminders, and visible
recognition of compliant behaviour can often be more effective than coercive enforcement alone.
• Rationalization of exemptions: Shifting from broad-based, open-ended exemptions
to targeted, time-bound incentives subject to periodic sunset and outcome evaluation.
For 2026, the memorandum should argue for a multi-year roadmap where widening the base is treated as a governance project, not a one-year revenue plug.
Tax Avoidance: Evolving Patterns and Risks
Tax avoidance relies on exploiting gaps and ambiguities in law rather than outright non-reporting. With increased cross-border digital activity, group restructuring and financial engineering, classic concepts based on physical presence and simple source rules are under strain.
Multinational groups, high-net-worth individuals and domestic conglomerates may engage in treaty shopping, use hybrid entities or instruments, or shift profits to low-tax jurisdictions. Left unchecked, such behaviour erodes the base, undermines fairness for compliant taxpayers and invites an arms race of complex, intrusive anti-avoidance legislation.
Existing Anti-Avoidance Architecture and Its Limitations
The legal framework already includes general anti-avoidance principles alongside many specific anti-avoidance rules. However, practical limitations are visible:
• Complexity and ambiguity: Broad drafting leaves wide discretion, making it hard
for taxpayers to anticipate how provisions will be applied in specific cases.
• Asymmetry of impact: Larger entities with resources and expert advice can
navigate or litigate complex rules, while smaller taxpayers may face disproportionate compliance
burdens.
• Overlap and duplication: Multiple specific provisions sometimes overlap, creating
confusion and interpretational disputes.
• Capacity constraints: Effective application requires deep understanding of
commercial realities, transfer pricing and international tax, which calls for continuous
specialization and training in the administration.
A pre-budget memorandum should therefore focus on improving quality and precision of anti-avoidance tools, not merely on adding more provisions.
Towards Smarter Anti-Avoidance Measures
A smarter anti-avoidance agenda for 2026 would emphasize:
• Clear triggers and thresholds: Well-defined financial and qualitative tests for
invoking general anti-avoidance, reducing fear of arbitrary application.
• Safe harbours and advance certainty: Wider safe harbour regimes and accessible
advance ruling mechanisms, allowing taxpayers to plan legitimate structures with confidence.
• Risk-focused enforcement: Data-driven targeting of high-risk arrangements rather
than diffuse scrutiny of routine transactions.
• Specialized capacity: Dedicated cells for complex cross-border and structured
finance transactions to ensure consistent and technically sound decisions.
The aim is to protect the revenue base from artificial arrangements while preserving space for genuine business restructuring and investment.
Tax Litigation: Volume, Delays and Systemic Costs
Tax litigation in India remains voluminous and prolonged. Significant revenue is locked up in disputes at various appellate levels, while businesses carry provisioning burdens, uncertainty and compliance costs for years.
Key drivers include frequent and complex amendments that generate interpretational disputes, variation in approach across field formations and appellate authorities, low monetary thresholds for departmental appeals, and limited use of alternative dispute resolution. The cumulative effect is a system where litigation becomes the default, not the exception.
Improving Quality of Tax Administration and Assessments
Many disputes originate at the assessment stage. Improving the quality of initial orders can prevent litigation at source:
• Consistency and interpretative guidance: Clear internal instructions and
clarificatory circulars can reduce divergent interpretations, while still respecting judicial
discipline.
• Risk-based scrutiny: Focusing detailed scrutiny on high-risk and high-value
cases, instead of broad-based assessments that generate low-yield disputes.
• Rebalanced performance metrics: Moving away from measuring officers mainly by
additions or demands raised, and towards sustainability of orders on appeal and quality of
reasoning.
• Sectoral specialization: Creating domain-specific teams for complex sectors such
as digital economy, financial services and transfer pricing to issue more consistent, informed
decisions.
These measures can meaningfully reduce avoidable disputes and improve trust in frontline administration.
Dispute Resolution: Reforming Processes and Institutions
A pre-budget memorandum should propose a comprehensive dispute resolution framework:
• Higher thresholds for departmental appeals: Rational thresholds ensure that only
matters of real revenue or legal significance are pursued, reducing volume at higher forums.
• Alternative dispute resolution: Expanded use of settlement mechanisms, mediation
or negotiated resolution for suitable cases can reduce caseload and improve speed.
• Time-bound processes: Indicative timelines, supported by adequate staffing and
digital case management, can reduce uncertainty and backlog.
• Fast-tracking repetitive issues: Mechanisms to identify recurring questions of
law and route them quickly to higher courts for authoritative resolution can prevent repeated
litigation on the same issue.
The goal is to position litigation as a last resort, not a routine step in the compliance cycle.
Leveraging Technology for Compliance and Dispute Management
Technology is a central enabler across tax base expansion, avoidance control and litigation management:
• Pre-filled and assisted compliance: Using existing data to pre-populate returns
and provide guided filing reduces errors and lowers entry barriers for new taxpayers.
• Analytics-driven risk selection: Advanced analytics can help identify
under-reporting, avoidance patterns and non-filers in a targeted, proportionate manner.
• End-to-end digital trails: Digital records of notices, submissions and orders
enhance transparency, reduce procedural disputes and enable better review.
• Online dispute resolution platforms: Portals for virtual hearings, document
management and status-tracking can compress timelines and make the process more accessible.
The memorandum should underscore that technology should function both as an enforcement tool and a service platform, improving experience for honest taxpayers.
Balancing Revenue Needs With Taxpayer Rights
Any reform package must balance legitimate revenue requirements with the rights and expectations of taxpayers. This balance is reflected in:
• Proportionality of enforcement: Intrusive powers such as search, seizure and
coercive recovery should be reserved for genuinely high-risk scenarios, with clear internal checks.
• Clarity and accessibility of law: Laws should be drafted with minimal ambiguity,
supported by timely clarifications when new provisions are introduced.
• Procedural fairness: Meaningful opportunities to be heard and reasoned, speaking
orders are fundamental to system credibility.
• Predictable compliance costs: For smaller taxpayers, compliance requirements
should remain proportionate to the scale of operations and risk profile.
Embedding these principles in legislation and administration strengthens long-term voluntary compliance and respect for the tax system.
Integrated Recommendations for the 2026 Budget Cycle
Bringing together these strands, an integrated pre-budget package for 2026 could include:
• On tax base: Integrated data architecture, targeted outreach to potential
taxpayers, simplified small-taxpayer regimes and regular review of exemptions with sunset clauses.
• On avoidance: Clearer general anti-avoidance thresholds, expanded safe harbours,
stronger advance ruling mechanisms and specialized administrative units for complex structures.
• On litigations: Improved assessment quality, elevated appeal thresholds, robust
alternative dispute resolution channels and modern digital case management systems.
• On governance: Performance metrics that value sustained, dispute-light revenue;
continuous officer training; and a service-oriented ethos in the tax administration.
The emphasis should be on a multi-year roadmap rather than one-off measures, recognising that improvements in one area reinforce the others.
Conclusion
The Pre-Budget Memorandum 2026 on tax base, avoidance and litigations should present a coherent blueprint for a more stable, fair and growth-friendly tax system. It should advocate a broader and more reliable tax base, anti-avoidance rules that are precise and proportionate, and a litigation framework that delivers timely, predictable outcomes.
If pursued, such a framework can strengthen revenue without overburdening compliant taxpayers, reduce uncertainty and friction in business planning, and build a healthier, more cooperative relationship between the State and its taxpayers well beyond the 2026 budget year.