India Tax & Regulatory Rewind 2025-26: A Year of Reset, Enforcement, and Alignment

Created By : Biyash Chakraborty | Senior Manager (Marketing)

2025 was a pivotal year in India’s tax and regulatory landscape. It was the moment when long-awaited reforms transitioned from mere discussions to tangible actions, legacy systems were revamped, and enforcement became more rigorous across the board. For example, corporate restructurings that used to breeze through are now under closer scrutiny from GAAR, cross-border arrangements are being evaluated based on real economic substance rather than just contractual terms, and GST systems are increasingly identifying discrepancies between returns and financial records in real time.

As businesses gear up for 2026, the old “business as usual” approach just won’t cut it anymore. Tax positions now require robust documentation, labour compliance needs to reflect actual workforce practices, and transaction structures must demonstrate genuine commercial intent. Boards and CXOs are now tasked with ensuring alignment—between legal frameworks and operational realities, between tax strategies and the underlying economics, and between compliance processes and digital reporting systems. While India continues to offer significant growth opportunities, it’s clear that regulators are raising the bar for governance, transparency, and accountability.

This blog takes a look back at the major tax and regulatory changes that defined 2025 and highlights what businesses should keep an eye on as they prepare for 2026.

Direct Tax: Structural Simplification with Higher Scrutiny

 In Direct Taxes, the introduction of the Income-tax Act, 2025 is the most comprehensive rewrite of India’s tax law since Independence, effective from 1 April 2026. The move to a unified “tax year,” rationalised TDS provisions, withdrawal of the Equalisation Levy, and targeted incentives such as presumptive taxation for strategic manufacturing signal simplification. Key updates include:

• Introduction of the Income-tax Act, 2025, effective 1 April 2026, streamlining provisions and removing legacy sections
• Adoption of the “tax year” concept, replacing the PY/AY framework
• Strengthening of the new personal tax regime with wider slabs and higher rebates
• Rationalisation of TDS and TCS thresholds and removal of penal provisions under sections 206AB/206CCA
• Withdrawal of the Equalisation Levy from 1 April 2025
• New presumptive taxation regime for non-residents in semiconductor and electronics manufacturing
• Intensified GAAR enforcement and expanded data-driven scrutiny through CBDT campaigns

Cross-Border Tax: Substance Over Form

Cross-border taxation in 2025 reinforced India’s shift towards substance and source-based taxation. Landmark judicial rulings clarified PE thresholds, treaty overrides, withholding tax positions, and foreign tax credit eligibility. Key updates include:

• Courts reinforced substance-based tests for Permanent Establishment, treaty benefits, and withholding taxes
• Clarification that treaty rates override domestic PAN-related provisions for non-residents
• Foreign tax credit recognised as a treaty right, even where Indian tax liability is nil
• Salary reimbursements on a cost-to-cost basis excluded from fees for technical services
• Treaty amendments with Oman, Qatar, and France tightened PPT norms, expanded PE rules, and strengthened source-based taxation

Indirect Taxes: Simplification with Digital Discipline

In indirect taxes, the focus moved from rate changes to system reform. Key updates include:

• Movement towards a simplified GST rate structure with targeted relief for key sectors
• Operationalisation of the GST Appellate Tribunal portal for faster dispute resolution
• Faster refunds, simplified registrations, and improved post-sale discount clarity
• Proposed reform of intermediary services to enable export treatment for cross-border services
• Customs reforms including voluntary revisions, consolidated exemption notifications, and time-bound assessments
• India–UK Free Trade Agreement enabling phased duty reductions with higher origin compliance standards

Labour Laws: From Transition to Enforcement

Labour law reforms crossed the threshold from transition to enforcement. With all four Labour Codes now in force, businesses must address CTC restructuring, expanded social security coverage for gig and contract workers, enhanced workplace safety obligations, and a reimagined industrial relations framework. Key updates include:

• All four Labour Codes now in force, replacing 29 legacy laws
• Mandatory CTC restructuring due to the 50 percent basic wage rule
• Expansion of social security to gig, platform, and contract workers
• Enhanced workplace safety, health, and welfare obligations with board-level accountability
• Shift to risk-based inspections and facilitator-led compliance
• Upcoming focus areas include gender-neutral POSH reforms and parental benefit frameworks

M&A and Corporate Restructuring: Nuanced, Regulated, and Closely Watched

The M&A landscape in 2025 mirrored these themes:

• Strong rebound in deal activity, led by technology, automotive, and BFSI sectors
• Tax neutrality restricted to court-approved demergers under the new tax law
• Tighter rules on carry-forward of losses in amalgamations
• Increased GAAR scrutiny on large group restructurings
• Expansion of fast-track merger framework proposed under the Companies Act
• Greater transparency in insolvency-driven M&A with enhanced tax disclosures

Actions Businesses Need to Take Now

India has entered a phase of, fewer grey zones, and higher enforcement intensity. As businesses plan for 2026, success will depend on well-aligned frameworks, thorough documentation, genuine economic substance, and forward-thinking compliance—rather than depending on outdated positions or form-based planning.

Step 1:

Let's begin with the fundamentals. Businesses should start by reevaluating their organizational structure as well as the way they handle important transactions. These days, it doesn't matter how the structure appears on paper; what matters is whether it accurately represents how the company runs and adds value.

Step 2:

Documentation follows. Clear and consistent records in tax, transfer pricing, labour, and corporate matters are now required due to increased scrutiny. Good documentation supports positions during reviews, aids in the explanation of decisions, and is more resilient to regulators' data-driven checks.

Step 3:

Businesses must now focus on the outside world. Standards for permanent establishment and source-based taxation are tightening, international tax laws are changing, and treaty interpretations are shifting. Cross-border agreements, both current and future, should be examined to make sure they continue to be strong in this new setting.

Step 4:

After that, compliance systems must be the focus. Compliance frameworks must be updated to keep up with regulatory change in light of the updated Income-tax Act, new Labour Codes, changing GST requirements, and expanding digital reporting obligations.

Step 5:

Developing early-warning systems is a crucial next step. Frequent internal audits and reviews can assist in identifying problems before they become disputes, fines, or enforcement actions.

Step 6:

Finally, businesses should be encouraged to take a collaborative approach. Engaging professional advisors for early uncertainty resolutions and collaborating in good faith to tax and compliance regulators may mitigate the risks associated with legacy positions and older structures.

Quick responsive businesses that implement constructive changes will be able to mitigate risks, sustain value, and foster long-term growth within the new regulations in India.

Please contact us at info@akmglobal.in or send your questions through the Enquiry Form to better understand how your business may be impacted for FY26-27.