As the nation prepares for the Union Budget 2026, the focus can be on fostering an inclusive economic thrust, supporting small and medium businesses to navigate challenges and seize opportunities in a rapidly evolving global landscape. The budget’s policies and provisions announcements will be much watched and it will play a pivotal role in shaping the economic trajectory and ensuring sustainable growth for future years.
The Hon’ble Finance Minister in her recent budget had designated MSMEs as the “second engine” of India’s economic growth, alongside agriculture, investment, and exports. As per data from the Ministry of Micro, Small & Medium Enterprises, as of January 2025, the number of MSMEs registered on the Udyam portal, including the Udyam Assist Platform (UAP), has reached over 7.21 crores with continual growth observed. Among these, 7.16 crores are classified as micro-enterprises, accounting for approximately 98.62% of the total. Small enterprises constitute around 4.2 lakhs, representing about 0.67%, while medium-sized enterprises constitutes around 36 thousand, comprising roughly 0.05% of the total registered entities. Notably, India has a significant number of MSMEs, which also play a pivotal role in economic growth and employment.
With the sector contributing 30.1% to India’s GDP, employing over 25 crore people, and accounting for 45.73% of total exports, MSMEs have emerged as critical engines of economic growth. The Hon’ble Finance Minister has already held extensive pre-budget consultations with MSME stakeholders in November 2025, signaling the government’s continued commitment to strengthening this vital sector.
- Certain expectations which the MSME sector is looking forward to in Budget 2026 include:
A. Reduction in income tax rate for Partnership Firms and LLPs with small businesses
Small businesses are often incorporated as partnership firms or LLPs as compared to corporates due to ease of formation, low cost of operation, reduced compliance burden and many such factors. As per the present law, partnership firms and LLPs are taxed at flat 30% (plus applicable surcharge and cess) resulting in a maximum effective tax rate of 34.94% in most cases. However, those businesses set up and operating as private limited companies are given the benefit of reduced effective tax rates such as 25.17% or 17.16%, subject to fulfillment of certain conditions.
A significant class of small and medium businesses operate either as partnership firms or LLPs and they pay tax at a much higher rate. Thus, in order to incentivize small and medium businesses who operate as Partnerships firms or LLPs, there is a need to reduce the tax rates for them or introduce a concessional regime for partnership firms and LLPs having turnover up to a certain limit so as to bring them at par with the corporates.
B. Deduction in respect of Employee Costs – Section 80JJAA [corresponding section 146 of ITA 25]
Under section 80JJAA [corresponding section 146(5)(b) of ITA 25] of the IT Act, assessees can claim a deduction of 30% of employee cost incurred on hiring new employees for 3 assessment years, provided the conditions mentioned therein are satisfied. One of the prescribed conditions is that the total emoluments paid to new employees are upto Rs. 25,000 per month. Such limit has not been revised since its introduction in Finance Act 2016.
The Code on Wages, 2019 has not only enhanced the minimum wages but has also expanded the definition of “employee” to include managerial and administrative personnel. Consequently, the Rs. 25,000 monthly salary cap is no longer aligned with industry realities, particularly in the organised sector. As a result, the present threshold limits businesses’ ability to claim deductions for genuinely new employment, thereby weakening the objective of the provision, which is to incentivise employment generation.
Given the widened scope of “employee” under the Code on Wages, our large workforce and need for massive employment generation, it is necessary to incentivize businesses that generate employment for the lower and mid-level wage and salary levels. It is also widely known that increased employment has a multiplier effect on the economic growth.
Also, while ITeS and Global Capability Centres (GCCs) continue to be important drivers of skilled employment, the IT sector is witnessing a slowdown. This has been aggravated by recent measures adopted by advanced economies curtailing offshoring and immigration, leading to slower hiring and highlighting the need for policy support to boost employment.
Considering the above and the inflation in the last 8 years, it is expected that the threshold limit of emoluments be increased from the present Rs.25,000 per month to Rs. 100,000 per month for the purpose of deduction under section 80JJAA.
C. Extension of sunset clause for Incentivizing New Manufacturing investment
Section 115BAB of the ITA, 1961 (corresponding to section 201 of the ITA, 2025 to be read with section 205), was introduced as a game-changing provision to attract manufacturing investments by offering a concessional corporate tax rate of 15% (effectively 17.16%). However, the intended benefits of this regime have been undermined by several structural limitations. Most notably, the time-bound nature of the scheme requiring incorporation by 31 March 2024 has effectively closed the door for new entrants. The high compliance expectations, combined with minimal flexibility, have collectively limited the regime’s adoption and impact.
To revitalize the Make in India vision and to help MSMEs attract long-term investments in key sectors, a new and improved version of the scheme is proposed.
- Extended Eligibility Timeline for Policy Certainty
To boost investor confidence and accommodate long-gestation manufacturing projects, the eligibility window under Section 115BAB should be extended from 31 March 2024 to 31 March 2029. This extended timeframe will promote long-term planning and sustained capital investment.
D. Rationalization of TDS rates for start-ups, small businesses
Certain sections provide a nominal TDS rate (for instance, Section 194C of the ITA, 1961[1]– applicable for contracts imposes a TDS rate @ 1%/2% depending upon the nature of tax deductee whereas 194H- applicable for commissions imposes a TDS rate of 2% (corresponding to section 393 and 402 of the ITA 2025[2]) whereas the TDS rates in certain other sections (Section 194J – applicable for Professional Services) is 10%.
Subjecting small businesses and start-ups to withholding requirements at say 10%, imposes restriction on their liquidity which is a vital factor for functioning of the business operations and creates working capital issues. Thus, it is expected that the TDS rates will be rationalized and reduced from 10% to 5% under section 194J of the ITA, 1961 (corresponding to section 393 and 402 of the ITA 2025).
E. To address issue of non-grant of full TDS credit appearing in Form 26AS
As per the existing income tax return (ITR) processing mechanism, small businesses and professionals are not granted full TDS credit appearing in Form 26AS in cases where the income offered in the ITR form (as per books) is lower than that reflecting in Form 26AS.
It is important to note that the receipts appearing in Form 26AS may be pertaining to income already offered to tax in preceding financial years or may be receipt of advance income and appearing in current year’s Form 26AS due to difference in method of accounting followed by the deductor and the taxpayer.
The result is non-grant of TDS credit to the taxpayer either in the preceding financial year in which income has been offered (as TDS credit does not appear in Form 26AS for that financial year) or in the subsequent year in which it is appearing in Form 26AS (as the income as per books is lower than gross receipts appearing in Form 26AS), resulting in loss of TDS credit to the taxpayer.
Therefore, in such cases, it is recommended to modify the ITR processing mechanism procedure and ensure TDS Credit be allowed in the year in which it is appearing in Form 26AS even if gross receipts as per Form 26AS are higher than income as offered in the ITR.
F. Applicability of Section 44AD / 44ADA (corresponding to section 58 of the ITA, 2025) to Limited Liability Partnerships (LLPs)
Sections 44AD and 44ADA of the ITA, 1961 (corresponding to section 58 of the ITA, 2025) provide simplified presumptive taxation for small businesses, applicable to individuals, HUFs, and partnership firms. However, LLPs, which are otherwise treated at par with partnership firms under the Income Tax Act, are excluded from this benefit. This exclusion imposes significant compliance burdens on LLPs despite their small-scale operations.
Given the turnover thresholds for presumptive taxation, extending these provisions to LLPs will simplify compliance without revenue loss to the government. It is recommended to allow LLPs to adopt presumptive taxation under these sections.
[1] Income Tax Act 1961 referred to as ITA 1961
[2] Income Tax Act 2025 referred to as ITA 2025
CA (Dr.) Suresh Surana
The Author is Founder, RSM Astute Consulting Group
