Corporate Taxation & Fiscal Policies in Budget 2025-26 – Understanding Corporate Tax Changes and Their Impact on Businesses

Introduction

The Union Budget 2025-26 has brought several crucial changes in corporate taxation and fiscal policies that will significantly impact businesses across India. From revised tax rates to new incentives and regulatory adjustments, this budget aims to foster economic growth while ensuring fiscal stability. In this comprehensive analysis, we explore the key corporate tax changes, fiscal policies, and their potential impact on businesses.

Key Corporate Taxation Changes in Budget 2025-26

1. Corporate Tax Rate Adjustments

One of the most anticipated aspects of the budget is the revision in corporate tax rates. For the financial year 2025-26:

The base corporate tax rate for domestic companies remains at 22%, with an effective tax rate of around 25.17% (including surcharge and cess).
The concessional tax regime for new manufacturing companies under section 115BAB remains at 15% (effective rate of approximately 17%).
Small and medium enterprises (SMEs) with an annual turnover of up to ₹500 crore will continue to enjoy a lower tax rate of 25%.

2. Incentives for Startups and MSMEs

The government has extended the tax holiday for eligible startups under Section 80-IAC until March 31, 2026.
A new investment-linked deduction has been introduced for startups engaged in deep-tech, AI, and renewable energy sectors.
MSMEs benefit from lower compliance burdens, with increased thresholds for presumptive taxation under Section 44AD.

3. Dividend Distribution Tax (DDT) and MAT Adjustments

The government has retained the existing dividend taxation framework where dividends are taxed in the hands of shareholders.
The Minimum Alternate Tax (MAT) for companies under special economic zones (SEZs) has been reduced from 15% to 10% to promote investments.

4. Changes in Capital Gains Taxation

The holding period for unlisted shares to qualify for long-term capital gains (LTCG) has been reduced from 24 months to 12 months.
Indexation benefits have been extended for startups and angel investors to reduce the tax burden on capital gains.

5. Rationalization of Tax Exemptions and Deductions

Several legacy exemptions and deductions have been phased out to simplify the tax system.
The government has increased tax deduction limits for R&D investments and green energy initiatives.

Fiscal Policies in Budget 2025-26

1. Fiscal Deficit Target and Government Borrowing

The fiscal deficit for FY 2025-26 is targeted at 5.4% of GDP, down from 5.9% in the previous year.
Government borrowing is estimated at ₹15 lakh crore, with a focus on infrastructure investments and digital transformation.

2. GST Reforms and Compliance Easing

The government has introduced an AI-powered GST compliance system to reduce tax evasion and ease input tax credit claims.
Small businesses with a turnover of up to ₹2 crore now enjoy quarterly GST filing instead of monthly compliance.

3. Customs Duty and Import Tax Adjustments

The budget has proposed customs duty reductions on raw materials for EV manufacturing and semiconductor production.
Import duties on luxury goods and non-essential imports have been increased to boost domestic production.

4. Foreign Direct Investment (FDI) Reforms

FDI limits in defense manufacturing and renewable energy have been raised from 49% to 74% under the automatic route.
Tax incentives have been introduced for foreign investors in priority sectors like green hydrogen and AI research.

Impact on Businesses

1. Large Corporations and MNCs

The retention of the 22% corporate tax rate ensures stability for large businesses.
Reduced MAT in SEZs encourages MNCs to invest in India’s export-oriented sectors.
Digital taxation policies impose new compliance requirements on tech giants and e-commerce firms.

2. Startups and Emerging Businesses

The extension of the tax holiday and capital gains tax benefits significantly support startups.
Investment-linked deductions for AI and deep-tech startups boost innovation and R&D spending.

3. MSMEs and Traditional Businesses

Simplified GST compliance reduces the administrative burden for MSMEs.
Lower presumptive taxation thresholds provide relief to small businesses.
Increased government credit support ensures easier access to funds for MSMEs.

Frequently Asked Questions (FAQs)

1. Has the corporate tax rate changed in Budget 2025-26?

No, the corporate tax rate remains at 22% for domestic companies and 15% for new manufacturing firms under Section 115BAB.

2. What are the key tax benefits for startups?

Startups benefit from the extended tax holiday until March 2026, reduced capital gains tax, and investment-linked deductions for R&D.

3. How does the budget impact MSMEs?

MSMEs gain from simplified GST compliance, lower presumptive taxation, and increased government credit support.

4. Are there any changes in Dividend Distribution Tax (DDT)?

No changes have been made to DDT; dividends remain taxable in the hands of shareholders.

5. What GST reforms have been introduced?

The government has introduced AI-powered GST compliance, quarterly GST filing for small businesses, and simplified input tax credit claims.

6. What fiscal measures are taken to control the deficit?

The fiscal deficit target is set at 5.4% of GDP, with increased borrowing for infrastructure and technology investments.

7. How will FDI changes impact businesses?

Increased FDI limits in defense, renewable energy, and AI sectors will attract more foreign investments.

Conclusion

The Budget 2025-26 introduces significant reforms in corporate taxation and fiscal policies, ensuring a stable tax regime while promoting growth and investment. Businesses, especially startups and MSMEs, stand to benefit from tax reliefs, compliance simplifications, and sector-specific incentives. With strategic fiscal planning, this budget paves the way for a robust economic landscape for businesses in India.

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