The Union Budget 2026 is set to arrive at a crucial juncture for India’s burgeoning digital commerce industry. As this sector transitions from its nascent ‘startup’ phase to become a significant player in India’s ambition to reach a $5 trillion economy, it is imperative that the fiscal policies reflect a stable regulatory framework. The Ministry of Finance’s upcoming fiscal roadmap for FY 2026-27 is expected to focus on fostering a conducive environment for digital growth, emphasizing regulatory clarity alongside social safeguards and streamlined compliance processes. This article delves into the regulatory priorities that could substantially influence the e-commerce landscape in the coming fiscal year.
Section 194O: Need for Operational Clarity Beyond Rate Reduction
A longstanding issue within the sector is the application of Tax Deducted at Source (TDS) as outlined in Section 194O. The welcome reduction in the TDS rate from 1% to 0.1%, effective October 2024, has benefited low-margin sellers. However, confusion persists over the definition of ‘gross amount.’ Current guidelines from the Central Board of Direct Taxes (CBDT) mandate TDS deductions on the gross invoice value, which includes components like shipping, convenience, and platform charges—essentially income for the platform rather than the seller. This policy effectively taxes sellers on income they do not receive, causing cash flow complications, especially in high-return sectors such as apparel, where returns range from 30-35%. A binding clarification to exclude platform-specific charges from ‘gross amount’ calculations would alleviate cash flow issues for smaller vendors. Additionally, implementing a standardized mechanism for computing TDS on net sales, inclusive of returns and cancellations, could further ease compliance burdens.
FDI Policy: Clarity on Inventory Models and Export Exemptions
The industry continues to seek resolution on Foreign Direct Investment (FDI) regulations, particularly those concerning inventory-based models. This debate has been reignited by the operational structures of ‘dark stores’ and a recent case involving Myntra, which faces allegations of violating Foreign Exchange Management Act (FEMA) rules worth INR 1,654 crore. A policy amendment supported by the Directorate General of Foreign Trade (DGFT) proposes allowing inventory-led models for export-only operations. Currently, foreign-funded platforms are prohibited from holding inventory, which limits their ability to ensure quality and expedited delivery to global markets. According to a March 2023 report from the Global Trade Research Initiative, such exemptions could propel India to achieve $350 billion in e-commerce exports, helping close the gap with China.
Gig Economy: Social Security and the ’10-Minute Delivery’ Debate
Recent strikes by gig workers led to government intervention that prompted platforms to abandon their ’10-minute delivery’ promises to prioritize worker safety. The workforce in this sector is expected to reach 23.5 million by 2030. Draft rules under the Code on Social Security, 2020, propose that aggregators contribute to a social security fund for gig workers, with a turnover-linked levy of up to 1-2%. However, this levy on turnover rather than profit could significantly impact the margins of platforms that already operate with high cash burns. The 2026 Budget offers an opportunity for transitional support, possibly through a dedicated fund to operationalize the Social Security Board and subsidize initial insurance costs.
ONDC: Bridging the Credit Gap for Financial Inclusion
The Open Network for Digital Commerce (ONDC) has democratized retail access and is now entering a phase of national scaling. As of October 2025, ONDC handled over 326 million orders, averaging nearly 600,000 transactions daily. Expanding ONDC to offer financial services like unsecured and secured credit, insurance, and investments is on the horizon. Its first pilot program is focusing on small-ticket unsecured loans and GST-based invoice loans for small merchants. While the 2024-25 Budget laid the groundwork for data-driven MSME lending, ONDC presents new opportunities by leveraging real-time transaction data. The 2026 Budget could facilitate regulatory pathways to integrate ONDC sales records into existing digital credit frameworks, thus allowing small online sellers to access formal credit based on actual transaction performance rather than traditional collateral.
Conclusion
As digital commerce becomes a major economic force, the sector’s primary demand from the 2026 Budget is regulatory certainty. From taxation and credit access to labor protections and investment regulations, these factors are crucial for ensuring investor confidence and operational stability in FY 2026-27. Now is the time to establish a regulatory framework that supports growth, competition, and inclusive progress.
About the authors: Stella Joseph is a Partner, Prakhil Mishra is a Principal Associate, and Shubham Bhandari is an Associate at Economic Laws Practice.
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