Nasscom Flags Tax Pain Points Ahead of Union Budget 2026

New Delhi, Jan 27 (KNN) Ahead of the Union Budget 2026, IT industry body Nasscom has called on the government to tackle key tax issues affecting startups and technology companies. 

As per a PTI report, Nasscom’s pre-Budget agenda seeks relief on ESOP taxation, clearer rules for cloud service providers, and a reduction in compliance burdens.

Call to Expand ESOP Tax Deferment

Nasscom has urged the government to extend ESOP tax deferment to all startups recognised by the DPIIT, rather than restricting it to those approved by the Inter-Ministerial Board.

At present, fewer than 4,000 startups benefit from the ESOP deferment introduced in 2020, out of nearly 1.59 lakh DPIIT-recognised startups.

“ESOPs enable startups to attract high-quality talent. Extending deferment will make the regime meaningful and help them compete with larger businesses,” Nasscom said in its pre-Budget memorandum.

The industry body also suggested permitting ESOP-related expenses to be claimed as deductions under Section 37 of the Income Tax Act, to improve the viability of equity-based compensation.

Tax Clarity Sought for Foreign Cloud Providers

Nasscom has sought clear guidance that hosting or co-location services availed from Indian data centre operators should not result in a permanent establishment for foreign cloud service providers. 

It said arm’s-length payments to Indian operators sufficiently compensate India-based activities, while foreign firms do not control local premises or carry out business in India. 

The industry body warned that the absence of clarity could lead to unintended tax exposure and deter global cloud players from expanding in the country.

Other Key Tax Recommendations

The association has suggested allowing the carry-forward of losses and depreciation in mergers and acquisitions for all companies, including services firms. 

It also proposed widening the SEZ reinvestment reserve to include leased technology assets, cloud infrastructure, software subscriptions, interiors, facilities and training costs.

To relieve working capital stress, Nasscom proposed cutting the pre-deposit for tax appeals from 20 percent to 10 percent of the disputed amount, in line with GST norms. It also urged that tax refunds should not be set off against demands that are already under stay.

(KNN Bureau)