Budget 2026: Tax Reforms Poised to Boost the Service Sector

The Union Budget 2026–27, unveiled on 1 February 2026, signals a decisive shift in fiscal strategy by recognising the services industry as a central pillar of India’s economic resilience and future growth. Rather than relying primarily on direct spending interventions, the Budget leverages tax reforms and administrative rationalisation to address long-standing challenges faced by service enterprises, including compliance complexity, uncertainty, and high transaction costs. Through measures aimed at simplifying tax laws, streamlining procedural requirements, and fostering a more predictable regulatory environment, the Budget strengthens the operating landscape for service providers. This policy direction underscores the government’s intent to enable innovation, competitiveness, and scalability within the services sector, reinforcing its role in driving employment, exports, and value creation in the Indian economy.

No Major Slab Changes But a Focus on Simplification

While the Finance Minister did not alter the basic income tax slabs or rates for individuals and corporates in Budget 2026 — maintaining stability in direct taxation — she placed emphasis on simplification and modernisation of the tax system.

One notable development is the rollout of the New Income Tax Act, 2025, which is set to take effect from 1 April 2026. This new law aims to replace outdated sections of the tax code with a modernised, streamlined framework that will reduce ambiguity and high litigation in service-oriented businesses — from IT firms to consultancies and hospitality services.

Reduced TCS and TDS Burden for Service Transactions

A key area of reform that directly affects service providers — especially those dealing with cross-border work and manpower services — is changes to Tax Collection at Source (TCS) and Tax Deduction at Source (TDS) rules:

The Budget reduced the TCS rate under the Liberalised Remittance Scheme (LRS) for certain foreign remittances, such as education and medical expenses, from 5 % to 2 %. Though this is a consumer-focused measure, it also has indirect benefits for businesses involved in overseas training, professional services, or advisory activities, by lowering the friction of outbound transactions.

Crucially for labour-intensive service industries — such as manpower supply, hospitality, and contracting — the Budget clarified TDS provisions by categorising the supply of manpower services under TDS at specified rates (typically 1 % or 2 %). This clarity will reduce disputes, lower compliance uncertainty, and help businesses plan cash flows better.

The Budget also proposed a rule-based automated scheme for small taxpayers to obtain lower or nil TDS certificates without filing specific applications. This has the potential to ease cash flow challenges for service-oriented SMEs and micro enterprises that are otherwise burdened by periodic deductions.

Safe Harbour Rule Expansion for IT & Tech Services

Perhaps one of the most significant direct tax reforms for India’s service industry came in the transfer pricing arena. The Finance Minister confirmed that India has raised the safe harbour threshold for IT services to ₹20 billion (₹2,000 crore), which provides greater operational flexibility and simplified compliance for global technology and IT service providers. This has an immediate impact on firms involved in software development, tech outsourcing, and digital services, reducing the probability of transfer pricing disputes with the tax authority and lowering the regulatory burden associated with international contracts.

By giving service exporters a predictable benchmark, India moves closer to global peers in creating a favourable tax regime for cross-border digital and IT services — a sector that has been a major contributor to export earnings and employment growth.

Tax Holidays and Incentives for Global Business Hubs

Another strategic tax measure with implications for services is the extension of tax holiday. Provision of tax holidays until 2047 to foreign companies providing cloud services to global customers through India-based data centre services. Related Entities providing data center services from India to get a safe-harbour of 15% on cost.

Miscellaneous Reforms That Help Service Businesses

Several other tax and compliance measures in Budget 2026 were aimed at improving the ease of doing business for service enterprises:

Extended deadline for revising income tax returns until March 31 (with a nominal fee), offering flexibility in managing tax compliance.

Automated acceptance of Forms 15G/15H for multiple companies via depositories, reducing paperwork for financial service providers and investors.

Exemptions from minimum alternate tax (MAT) for certain non-resident service providers under presumptive schemes.

By rationalising TDS/TCS provisions, expanding safe harbour norms, offering long-term tax holidays, and modernising the tax code, the Government has signalled its intent to make India a competitive and global destination for services. As these reforms take root, they are expected to reduce compliance costs, unlock growth potential, and enhance India’s ability to attract international business.

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