Union Budget 2026: Fiscal Discipline and Sectoral Support, but Indigenous Innovation Awaits Its Turn
As Published on Inc42.
The Budget does what responsible governments should do: it prioritises macroeconomic stability and addresses structural inefficiencies without resorting to populist giveaways. FM Nirmala Sitharaman has delivered a credible Budget that projects nominal GDP growth of 7-7.5% for FY27. For the technology ecosystem, there are tangible wins, particularly around IT services, manufacturing, and procedural simplifications. But several critical priorities remain unaddressed.
Fiscal Discipline Creates Room for Private Capital
The Budget's greatest achievement is what it avoids: fiscal expansion in favour of political optics. The Government has raised gross tax collections from ₹33.42 lakh crore to ₹35.33 lakh crore despite larger-than-budgeted tax reliefs. By maintaining expenditure discipline and achieving revenue buoyancy through compliance improvements rather than rate increases, the government signals that India's growth story will compound on structural reforms, not just short-term stimulus. This matters for startups.
The Economic Survey's recommendation to lower the cost of capital through diversified financing and reduced taxes on debt instruments has found partial expression here. Fiscal consolidation and discipline reduces sovereign borrowing pressure, improves bond market conditions, and creates space for private-sector investment. That space is critical for affordable debt and alternative credit markets, which growth-stage companies desperately need.
IT Services Finally Gets the Clarity It Deserves
The Budget's most concrete win for technology lies in its overhaul of rules for IT services. By clubbing software development, IT-enabled services, knowledge process outsourcing, and contract R&D under a single category with a standardised safe harbour margin of 15.5%, the government has eliminated years of uncertainty. The threshold for availing safe harbour has jumped from ₹300 crore to ₹2,000 crore. The approval process will be automated. Agreements can be extended for five years at a stretch. The commitment to fast-track unilateral Advanced Pricing Agreements within two years cements the intent.
For Indian B2B SaaS and engineering services startups serving global clients, this is transformational. Predictable transfer pricing reduces friction, lowers effective tax rates, and makes India a more attractive delivery hub. This reform finally treats IT services as the strategic asset it is, not an afterthought in tax policy.
Manufacturing, Critical Minerals, and Data Centres: Accelerating Strategic Depth
The Budget demonstrates strategic foresight in manufacturing and critical minerals. The government will support states in establishing dedicated rare-earth corridors. Customs duties are fully exempted on cobalt powder, lithium-ion battery scrap, and critical mineral waste. A ₹440 crore allocation to the National Critical Mineral Mission positions India to reduce import dependence in sectors critical to clean energy, electronics, and defence.
The India Semiconductor Mission 2.0 expands to include equipment, materials, full-stack IP design, and supply chain fortification. The Electronics Components Manufacturing Scheme allocation increases from ₹22,919 crore to ₹40,000 crore. These moves signal a commitment to building indigenous capabilities in sectors where China currently dominates global supply chains.
The tax holiday till 2047 for foreign companies providing cloud services globally using Indian data centre infrastructure, coupled with a 15% safe harbour on cost for related-party services, is a watershed moment. Google is committing $15 billion, Amazon over $35 billion by 2030, and TCS ₹18,000 crore in AI-ready Indian data centres. India is finally competing on equal footing with Singapore and Ireland. But this should be a template for support to indigenous innovators as well. If safe harbour mechanisms attract global capital to build from India, the same principle must extend to homegrown innovators taking Indian technology global.
A Yuva Shakti-Inspired Budget: Process Innovation Matters
This Budget reflects a meaningful evolution in process. Through the Viksit Bharat Young Leaders Dialogue 2026, Prime Minister Modi consulted directly with young innovators, entrepreneurs, and ecosystem builders. Several proposals announced reflect ideas that emerged from those conversations. This consultative approach is refreshing. When policymakers engage practitioners rather than just bureaucrats, the resulting frameworks tend to be more pragmatic and aligned with ground realities. India’s innovators deserve to have their voice heard beyond just social media. This represents a template for how economic policy can be formulated in a rapidly evolving innovation economy by engaging with practitioners to deliver meaningful change.
Ease of Doing Business: Addressing Real Friction Points
The Budget's procedural improvements deserve recognition. The rollout of a Customs Integrated System over the next two years, the digital window for cargo clearance approvals, and the removal of the ₹10 lakh value cap on courier exports represent genuine wins for D2C startups and hardware companies. For startups shipping high-value products globally or importing components for electronics manufacturing, these changes reduce friction and turnaround times significantly.
Revised baggage clearance provisions, enhanced duty-free allowances, and the reduction of Tax Collected at Source on overseas tour packages and education-related remittances from 5-20% down to a uniform 2% will benefit citizens, travel startups, edtech companies, and the broader ecosystem of professionals travelling for business development. The introduction of Corporate Mitras to reduce compliance burden for early-stage startups and MSMEs in Tier-II and Tier-III towns reflects an understanding that regulatory friction disproportionately affects smaller companies.
Buyback Taxation: A Win for Employees, Not Founders
The Budget treats buybacks as capital gains for all shareholders holding less than 10% of a company, whilst imposing an additional levy on promoters. This particularly benefits employees and small shareholders. For employees who have already paid tax at slab rates upon ESOP exercise, the previous treatment of buyback proceeds as dividend income fully negated the benefits of equity compensation. By treating subsequent gains as capital gains, the Budget makes buybacks a tax-efficient exit avenue. This matters for startup employees whose liquidity is often constrained for years.
However, promoters and founders also deserved relief. Many are returning capital to fund new ventures or philanthropic initiatives. That this remains unaddressed suggests the government still views buybacks primarily through the lens of tax arbitrage prevention rather than as a legitimate capital allocation tool.
The Startup Ecosystem Deserved More Explicit Attention
Here lies the Budget's most significant gap. Despite India's climb to 38th position in the Global Innovation Index 2025, up from 66th in 2019, and despite the emergence of over 4000 deep-tech startups, the startup ecosystem received no dedicated section or comprehensive policy framework. The increasing need for strategic indigenous technological R&D has been top of mind since the last Budget. Yet this Budget treats innovation infrastructure and IP creation differently, favouring the former whilst underweighting the latter.
Three Critical Priorities Still Awaiting Action
First, fiscal incentives for sovereign wealth funds, global endowments, and foundations to invest long-term FDI in India remain absent. These institutions represent patient, decade-long capital critical for deep tech and infrastructure-heavy startups. India offers no tax advantages comparable to those available in competing jurisdictions. This is a strategic miss.
Second, ESOP taxation continues to make Indian startups less competitive in the global talent market. Whilst the buyback reform helps post-exercise, the fundamental issue remains unaddressed: taxation at grant versus exercise, and treatment of gains as income rather than capital. Global best practices tax ESOPs only upon sale, treating gains as capital appreciation. Until India adopts similar frameworks, startups will struggle to attract world-class talent against Silicon Valley, Singapore, and East Asian competitors.
Third, founder stock incentives require simplification and alignment with global norms. The complexity and unfavourable tax treatment of founder equity structures create unnecessary friction and discourage entrepreneurship, particularly amongst repeat founders and those transitioning from stable careers.
The Missing Priority: Indigenous Deep Tech Deserves A Level Playing Field
Budget 2026-27 represents a solid, disciplined exercise in fiscal consolidation with genuine wins in IT services reforms, cloud infrastructure incentives, and manufacturing support. To build on this foundation and truly position India as a global hub for both infrastructure and IP creation, the logical next step involves extending similar fiscal certainty to indigenous deep tech innovators in energy, space, robotics, advanced manufacturing, and semiconductors.
While global technology companies now receive tax holidays to build infrastructure in India, homegrown companies developing proprietary IP face different treatment. India's space-tech sector exemplifies the opportunity: companies possess engineering talent and early funding, yet face customer adoption challenges when competing against established legacy systems and state-sponsored global competitors. A structured procurement policy combined with safe harbour incentives for indigenous deep tech R&D and capex would create parity and unlock globally competitive companies across strategic sectors.
The innovation ecosystem seeks what any competitive market requires: a level playing field, predictable rules, safe harbour provisions, and recognition that innovation-driven growth demands policy frameworks as sophisticated as those offered to traditional infrastructure. This Budget establishes important precedents. Future policy briefs can complete the architecture by ensuring homegrown innovators building the technologies of tomorrow receive the same institutional support as global companies building India's physical infrastructure today.
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