An analysis of direct and indirect tax amendments from Union Budget 2026 and their impact on small and medium enterprises.
Direct Tax Amendments Impacting MSMEs
Union Budget 2026 introduced several targeted amendments for the MSME sector, including a revised tax slab for sole proprietorships and partnership firms with turnover below Rs 5 crore. The presumptive taxation scheme under Section 44AD has been expanded to cover a wider range of service businesses, reducing compliance burden for small operators. Additionally, the enhanced deduction under Section 80G for donations to MSME development funds provides a dual benefit of reduced tax liability and sectoral contribution.
Of particular significance is the amendment to Section 43B, which now mandates that payments to MSMEs must be made within 45 days for the paying entity to claim a deduction. The earlier provision of 15 days for MSME-to-MSME transactions remains unchanged, but the expanded scope of "specified person" under the section means that more corporate buyers must now ensure timely payments or face deduction disallowance in the year of payment rather than year of actual disbursement.
Indirect Tax and GST Changes
The Budget has rationalised several GST rates applicable to MSME products, particularly in the handicrafts, agro-processing, and labour-intensive manufacturing sectors. The composition scheme threshold has been raised from Rs 1.5 crore to Rs 2 crore in annual turnover, allowing more businesses to opt for the simplified quarterly filing mechanism. This is expected to reduce the administrative overhead for approximately 2.3 lakh additional enterprises.
MSME exporters stand to benefit from the streamlined LUT (Letter of Undertaking) process introduced alongside the Budget. The system now permits auto-renewal of LUTs where the exporter has a clean compliance history for the previous two years. This eliminates the annual manual filing requirement and helps exporters maintain continuous zero-rated supply status without compliance interruptions.
Compliance Calendar and Key Deadlines
MSMEs should note several revised due dates and procedural changes effective from April 1, 2026. The updated UDYAM registration linkage with PAN and GST databases means that any inconsistency between these records can now trigger automatic notices. It is advisable to conduct a data reconciliation exercise before Q1 closes to ensure that the registration details across government portals are consistent.
The Budget also introduced a simplified dispute resolution mechanism for MSME tax disputes involving amounts below Rs 25 lakh. Cases meeting this threshold may now be resolved through a new faceless conciliation process, reducing the typical resolution timeline from three to five years to an expected six to eighteen months. Eligible MSMEs with pending appeals should evaluate whether migrating their cases to this new mechanism is strategically advantageous.
