India’s missing a tax framework for M&A wave

Outbound investments from India have scaled new heights in the recent years driven by the eagerness of Indian corporates to explore new markets, invest in modern technologies and availability of strategic assets beyond the Indian market, in addition to the relatively higher valuation multiples provided by the Indian markets as compared to the peers overseas. Indian corporates are engaging in outbound acquisitions to secure supply chains, acquire newer technology and talent, brand awareness and the likes.While Indian corporates have started embracing globalization, the Indian tax and regulatory framework has not been able to keep pace with the complexity of deal making. Although India’s tax regime for cross-border transactions has been amended considerably over the past decade to provide clarity, reduce disputes, and align with global norms but, there remains a pressing need for further revamp the tax regime to provide stronger stimulus for Indian corporates eying an international footprint.From a regulatory angle, though Indian corporates overseas investment limits have been simplified compared to the past, there is a need for some reforms especially to allow larger acquisitions beyond the current limit of $1 billion and 4x the net worth. The proposal to allow banks and liberalize External Commercial Borrowing regulations to selectively fund acquisitions (including overseas acquisitions) is a positive step.Catch our full Budget 2026 coverage hereGiven that debt financing is a key element for evaluating an investment, uncertainty on availability of tax break on the interest cost incurred on such debt is a deterrent for Indian corporates. Hence, a clear provision allowing deduction for interest on funds borrowed for strategic investments would encourage Indian corporates looking to acquire businesses.While the current tax regime provides tax neutrality for overseas company merging into India, the same is not provided for an Indian company merging into an overseas company. It is critical to introduce such provisions allowing for tax neutral reorganization with sufficient safeguards to tax actual gains as and when the taxpayer monetizes such investments.Also Read| Budget 2026: Sustaining India’s growth depends on consumption, investment, and fiscal consolidationIndia should consider introducing a structured incentive program similar to Singapore’s Internationalization Scheme to allow weighted deductions for expenses incurred on participation in overseas trade fairs and exhibitions, market research and feasibility studies for outbound investments, travel and consultancy costs for evaluating foreign acquisitions, etc.India has entered into comprehensive Double Taxation Avoidance Agreements (DTAAs) with 97 countries and limited agreements with 8 others. However, several jurisdictions such as Ghana, Peru, Cayman Islands and Maldives are not part of India’s treaty network. India should expand its DTAA network to cover such to reduce risk of double taxation and provide certainty for cross-border transactions.Another significant issue for the Indian corporate is double taxation on dividends received from overseas. Though the overseas entities have already paid corporate tax on their profits, most DTAAs only allow credit of the taxes withheld overseas and not for the underlying corporate taxes. India should renegotiate its DTAAs with the EU, the US, and emerging markets to include Underlying Tax Credit (UTC) provisions similar to DTAAs with Singapore and Mauritius. Additionally, India could look to introduce rules to address timing mismatches between India’s financial year and the calendar-year followed overseas to allow proportionate credit and carry-forward of unutilized foreign tax credits.There is a need for clearer guidelines, targeted exemptions and credit rules under the Place of Effective Management (POEM) provisions under the current tax regime for foreign companies owned by India-headquartered entities. This will reduce compliance burdens and provide clarity on the applicability of taxes for arms of Indian corporates in different jurisdictions.'Also Read| Budget 2026: Sitharaman & Co will be counting every rupee on the road to Viksit Bharat 2047With regard to the dispute resolution mechanisms, India’s current advance tax ruling framework is suffering from prolonged delays making it impractical for businesses planning outbound acquisitions and this uncertainty is forcing Indian corporates to take decisions without clarity on tax implications, increasing compliance risk and potential disputes in the future. Hence, the Indian government must urgently implement a streamlined, time-bound mechanism for advance rulings like Singapore which issues rulings within 1–2 months. A robust and efficient system in India will not only reduce litigation but also empower Indian corporates to compete effectively in the international markets.India had entered into Bilateral Investment Treaty (BIT) aiming to promote and protect foreign private investments between two nations by providing mutual assurances and creating a stable, predictable environment for cross-border investments. However, following a surge in investor–state dispute settlement (ISDS) claims under the BITs, the Indian government terminated its BITs with 77 out of 83 countries and introduced a new Model BIT in 2016, which has been renegotiated only with a handful of countries, while negotiations with others remain are ongoing at snail pace. Hence, updated BITs with a balanced ISDS provision and participation exemptions are essential to provide predictability for investors, reduce compliance costs and create a robust framework for structured global expansion.The Indian government can empower Indian corporates to scale globally, create high-value jobs, deepen technology capabilities and establish a strong international footprint by aligning the tax policy with global best practices.Outbound acquisitions are not merely strategic, they are essential for the new India’s ambition to be Atmanirbhar and build world-leading multinational corporations and today India stands at an inflection point with the economic growth accelerating and the Indian corporates increasingly acquiring global businesses, a competitive, modern, and certainty-driven tax framework is no longer optional, it’s imperative.The Government should consider introducing enabling provisions in the forthcoming budget on the above aspects to provide an optimal tax environment encouraging Indian MNCs to expand globally.The author is Partner & National Head – Deal Advisory – M&A Tax, PE KPMG in India. A Palaniappan – Partner and Anuj Chowdhari – Manager at KPMG in India contributed to the article.