M&A Tax Due Diligence in India (2026): Income‑tax, GST, Customs & Transfer Pricing Checklist

M&A tax due diligence india has entered a new phase in 2026, reshaped by the enactment of the Income‑tax Act, 2025, which received Presidential assent in August 2025 and is scheduled to come into force from 1 April 2026, together with the accompanying rules being notified by the Central Board of Direct Taxes. For in‑house counsel, private equity and strategic buyers, sellers and target CFOs, the tax exposures that once sat quietly in a data room now demand a structured, cross‑regime review spanning income tax, GST, customs and transfer pricing. This guide delivers a transaction‑ready playbook: a master checklist, a deep dive into each tax regime, sample warranty and indemnity language, and a post‑closing dispute management plan.

The aim is a single, actionable resource that maps the evolving statutory landscape to concrete diligence steps you can run before signing and before closing.

This article is for general guidance only and does not constitute legal advice. Consult qualified tax counsel for transaction‑specific matters.

Why M&A tax due diligence matters in India in 2026

Tax is rarely the reason a deal happens, but it is frequently the reason a deal fails, is repriced, or generates litigation years after closing. In India, the combination of active assessment practices, a heavily digitised indirect tax system, and evolving transfer pricing scrutiny means that historical tax positions carry real, quantifiable risk for an acquirer. The Income‑tax Act, 2025 consolidates and restructures the direct tax framework that previously sat in the Income‑tax Act, 1961, and diligence teams must read historical positions with an eye on how procedural routes for assessment and appeal will operate as the new Act takes effect.

Effective m&a tax due diligence india starts early. Counsel should be instructed at the term‑sheet stage so that tax risk allocation, escrow sizing and warranty scope can be negotiated with evidence rather than assumption. A rushed pre‑closing review invariably misses latent GST input credit reversals, open transfer pricing years, or customs valuation disputes that only surface when the tax authority issues a show‑cause notice. The sections that follow move from framework to checklist to remediation, so that both buy‑side and sell‑side teams can work from the same map.

Transactional framework: who checks what (buyer vs seller)

The starting point for any m&a tax due diligence india exercise is a clear allocation of responsibility. In a buy‑side review, the acquirer investigates the target’s historical tax positions to identify exposures, price them, and decide whether to allocate them through indemnities, escrows or specific warranties. In a sell‑side (vendor) review, the seller assembles a tax pack and pre‑empts questions, controlling disclosure to reduce the risk of post‑closing claims. Both approaches benefit from disciplined data room workflows and a materiality threshold agreed at the outset.

Buyer responsibilities: due diligence scope

The buyer’s team should scope the review to cover income tax, GST, customs and transfer pricing across the open assessment years, plus any period where limitation has not expired for reassessment. Key buyer tasks include:

• Define materiality. Set a de minimis threshold below which individual issues are logged but not quantified in detail.
• Build a red‑flag register. Track every open notice, pending appeal, and reconciliation gap against a quantified exposure estimate.
• Test continuity. Confirm that tax holidays, carry‑forward losses and concessions survive a change of control.
• Map remedies. Translate exposures into escrow, holdback, specific indemnity or warranty and indemnity insurance.

Seller responsibilities: disclosure and tax packs

Sellers reduce their residual liability by disclosing accurately. A well‑prepared tax pack contains filed returns, computations, assessment orders, appeal status, transfer pricing studies, GST reconciliations and customs filings for the relevant years. Full and specific disclosure against the warranties is the seller’s primary defence: a matter fairly disclosed in the disclosure letter generally cannot later found a warranty claim. Sellers who invest in a pre‑sale review typically negotiate tighter caps and shorter survival periods.

On the recurring question of how to find a good tax lawyer for a transaction, both sides should prioritise practitioners with hands‑on controversy experience across all four regimes, not merely advisory capability, because the value of diligence lies in defending exposures if they later crystallise.

Step‑by‑step m&a tax due diligence india: the master checklist

This is the operational core of the exercise. The tax due diligence checklist india below is organised by regime. Run it against the data room, then convert each unresolved item into a red flag with a quantified estimate and a proposed contractual remedy.

Income tax due diligence checklist

For income tax due diligence india, request and interrogate the following:

• Filed returns and computations for all open assessment years, cross‑checked against audited financials.
• Assessment and reassessment orders, including any faceless assessment orders and orders under the reassessment regime.
• Notices and rectification records, demand notices, and details of any search, survey or seizure proceedings.
• Pending appeals before the Commissioner (Appeals), the Income‑tax Appellate Tribunal, and the High Courts or Supreme Court, with a status note and quantified demand.
• Tax paid versus tax reported, perform arithmetic reconciliation to catch under‑payment or unrecorded demands.
• Penalty exposure, review any concealment or misreporting penalty proceedings and their current stage.
• Withholding tax compliance, verify deduction and deposit of tax at source, and check for disallowances arising from non‑compliance.
• Carry‑forward losses and continuity, confirm losses survive the change of shareholding under the applicable continuity test.

Sample question for management or the target’s chartered accountant: “For each open year, please provide the return, the assessment order, the current appeal stage, and the quantum of any outstanding or contested demand, with supporting orders.”

GST due diligence checklist

GST due diligence india is highly reconciliation‑driven because the system is digitised end to end. Verify:

• All GST registrations are valid, and check composition scheme eligibility where claimed.
• GSTR‑1 versus GSTR‑3B versus e‑invoicing data, reconcile outward supplies across all three to identify mismatches.
• Input tax credit (ITC) claims, validate against auto‑populated GSTR‑2B and supplier filings, and identify blocked or reversed credits.
• ITC reversals and interest, quantify interest and penalty exposure on wrongly availed credit.
• Refund claims, check status, rejections and pending litigation.
• Show‑cause notices and audits, list open departmental audits and adjudication proceedings with exposure estimates.

Customs due diligence checklist

For customs due diligence india, sample a representative set of bills of entry and shipping bills, then verify:

• HS classification, confirm the correct tariff heading and identify any misclassification risk affecting duty rates.
• Declared valuation, check that transaction value is supported and consistent with related‑party pricing; review any Special Valuation Branch proceedings.
• Preferential origin claims, verify that origin certificates support any concessional duty claimed under free trade agreements.
• Duty exemptions and drawback, confirm eligibility and compliance with export incentive and foreign trade policy conditions.
• Pending customs proceedings, list any demand, penalty or confiscation proceedings.

Transfer pricing due diligence checklist

Transfer pricing due diligence focuses on documentation currency and arm’s length exposure. Confirm:

• TP study existence and currency, verify a contemporaneous study covers each open year.
• Related party transactions (RPTs), map all international and specified domestic transactions with associated enterprises.
• Master file and local file status, confirm filing where the prescribed thresholds apply, consistent with OECD‑aligned documentation standards.
• Open TP adjustments, quantify any arm’s length price adjustments proposed or made in assessment.
• Advance Pricing Agreements (APAs), check for concluded, pending or rollback APAs and their coverage.

Income‑tax deep dive: Income‑tax Act, 2025 implications for m&a tax due diligence india

The Income‑tax Act, 2025 is a significant development for m&a tax due diligence india in the current cycle. As it consolidates and restructures the direct tax code and carries forward the general anti‑avoidance rules, diligence teams should assess historical positions with an awareness of how procedural routes will operate once the new Act is fully in force. Where a specific procedural change is uncertain, confirm the position against the notified rules and the current instructions of the Central Board of Direct Taxes.

Key clauses to search in target documents

When reviewing corporate and commercial documents, search specifically for change‑of‑control provisions, indemnity and set‑off clauses in prior share purchase agreements, and any tax‑sharing arrangements from earlier reorganisations. Historical amalgamations, demergers and slump sales deserve close attention: the tax neutrality claimed for a past reorganisation is only as robust as compliance with the conditions attached to it, and a failed condition can reopen capital gains exposure for the successor entity.

Assessing historical returns and litigation

Build a litigation matrix covering every open year: the demand raised, the amount paid under protest, the appellate stage, and the realistic probability of success. This matters because the appeal architecture governs how quickly a contested demand can move to enforcement. Where the target has aggressive positions on capital gains, business income characterisation, or claimed exemptions, model both the base case and the downside, and reflect the downside in escrow or specific indemnity. Landmark jurisprudence from the Supreme Court of India on the taxation of indirect transfers of Indian assets remains directly relevant when assessing offshore or multi‑tier structures in the target’s history.

Tax concessions, carry‑forwards and continuity tests

Tax holidays, deductions and accumulated losses are valuable only if they survive the transaction. Continuity of shareholding tests can extinguish carried‑forward business losses on a qualifying change of control, and area‑ or sector‑based concessions may carry conditions that a new owner must continue to satisfy. Quantify the value at risk if a concession is revoked or a loss is disallowed, and treat that figure as a contingent liability in the price model. A well‑run m&a tax due diligence india process values these attributes explicitly rather than assuming they transfer intact.

GST risks and transitional issues: the 2026 focus

GST exposures dominate indirect tax findings because the regime is unforgiving of reconciliation failures. The Goods and Services Tax portal captures outward supplies, e‑invoicing data and returns, so mismatches are visible to the department and to a diligent acquirer alike. In 2026, the priority areas are input tax credit continuity, e‑invoicing accuracy, and the resolution of legacy transitional credit disputes.

ITC verification

Input tax credit is often the largest recurring GST exposure. Confirm that credit availed corresponds to supplier filings and the auto‑populated GSTR‑2B, that ineligible or blocked credits have not been claimed, and that any reversals required have been made with the correct interest. Where a supplier has defaulted, the target’s credit may be at risk, and the resulting demand plus interest and penalty should be quantified per year. Persistent ITC mismatches suggest weak controls and justify a specific indemnity rather than reliance on a general tax warranty.

Past returns and audits (GSTRs)

Reconcile GSTR‑1, GSTR‑3B and the annual return (GSTR‑9, with the reconciliation statement in GSTR‑9C where applicable) across all open periods, and list every open departmental audit, scrutiny notice and adjudication. Each open proceeding is a live contingent liability. Where the target operates across multiple states, run the reconciliation per registration, because exposures and audit timelines differ by jurisdiction.

E‑invoicing and invoicing mismatches

E‑invoicing compliance is now central. Verify that invoices for entities above the applicable turnover threshold carry valid invoice reference numbers and that e‑invoice data reconciles to the returns filed. Systematic e‑invoicing mismatches can trigger denial of credit to the target’s customers and expose the target to interest and penalty, so a sample audit of high‑value invoices is essential in any GST due diligence india review. Current turnover thresholds and procedural requirements are published by the Central Board of Indirect Taxes and Customs and on the GST portal, and should be checked against the notification in force for each period reviewed.

Customs and international trade diligence

For targets that import or export, customs and trade compliance can hold material exposure, particularly where classification or valuation has been optimistic. Because customs valuation and transfer pricing interact, the price paid to a related supplier is scrutinised by both regimes, a finding in one area frequently signals risk in the other.

HS code review

Sample the target’s bills of entry and confirm that goods are classified under the correct HS heading. Misclassification that understates duty creates a demand for differential duty plus interest and potential penalty, often across several years. Where the target relies on a favourable classification for a key product line, obtain the supporting rationale and test it against published tariff and classification guidance from the Central Board of Indirect Taxes and Customs.

Valuation and transfer pricing interactions

Customs authorities may challenge the declared value of goods purchased from related parties, a matter often examined by the Special Valuation Branch, while the transfer pricing authority may test the same price for income‑tax purposes. A downward transfer pricing adjustment can imply an understated customs value, and vice versa. Review related‑party import pricing holistically, and flag any position where the two regimes could pull in opposite directions. Also confirm compliance with foreign trade policy conditions and export incentive claims administered through the Directorate General of Foreign Trade, since clawback of incentives is a recognised exposure.

Transfer pricing and international transactions

Transfer pricing is a perennial source of large, disputed adjustments, and it deserves dedicated attention in any m&a tax due diligence india exercise involving a group with cross‑border dealings. The objective is to confirm that intra‑group pricing is defensible, documented contemporaneously, and consistent with the arm’s length principle as articulated in the OECD Transfer Pricing Guidelines and Indian transfer pricing law.

Benchmarking red flags

Scrutinise the benchmarking analysis for each material related party transaction. Common red flags include the use of stale comparables, inconsistent selection of the tested party, aggressive characterisation of routine functions as high value, and margins that sit conveniently at the edge of the arm’s length range. Where the target has recurring losses on captive service or manufacturing arrangements, expect the authority to challenge the position, and price that risk accordingly.

Open TP audits and APAs

List all open transfer pricing audits and any proposed or completed adjustments, then assess the appellate stage and probability of success. A concluded or pending Advance Pricing Agreement is a valuable de‑risking tool because it provides certainty over covered years; confirm its scope, rollback coverage and continued applicability after the change of control. Where documentation is thin, the practical remediation is to commission contemporaneous studies and remodel the pricing before closing, so that the position is defensible if audited.

Quantifying exposures and drafting tax warranties, indemnities and escrows

Diligence findings are only useful if they translate into contractual protection. Quantify each exposure with a base case and a downside, aggregate them, and use the total to negotiate warranty caps, indemnity baskets, escrow amounts and survival periods. In current Indian market practice, tax matters are frequently carved out from general warranty caps and survival limits and dealt with through a specific tax indemnity that survives for the limitation period of the underlying tax.

Buyer versus seller negotiating checklist

• Cap. Buyers seek a higher cap for tax; sellers push for a cap linked to the purchase price.
• Basket and threshold. Agree a de minimis per claim and an aggregate basket before liability arises.
• Survival period. Align tax warranty survival with the reassessment limitation period rather than a fixed short window.
• Escrow and retention. Size the escrow to the quantified downside on identified exposures.
• Gross‑up and conduct. Address gross‑up on indemnity payments and control of tax proceedings.
• Insurance. Consider warranty and indemnity insurance for clean exposures where the seller resists a large escrow.

Sample warranty and indemnity clauses

The following snippets are illustrative only and must be tailored by counsel.

Tax warranty (illustrative): “The Company has, within the periods prescribed by law, duly filed all tax returns required to be filed and has paid all tax due and payable. All such returns were correct and complete in all material respects, and no material dispute, assessment or proceeding is pending or, to the Sellers’ knowledge, threatened.”

Tax indemnity (illustrative): “The Sellers shall indemnify the Buyer on an after‑tax basis against any tax liability of the Company arising in respect of any period ending on or before the Closing Date, together with reasonable costs of defence, subject to the conduct provisions set out in Schedule [·].”

Post‑closing tax dispute management and remedial playbook

Even a thorough m&a tax due diligence india process cannot eliminate every exposure, so a post‑closing plan is essential. Post‑closing tax disputes india typically arise when a legacy assessment year is reopened or an appeal is decided adversely after the deal has closed. The immediate priorities are preservation of evidence and clarity on who controls the defence.

When to trigger the indemnity

The indemnity conduct clause should specify the notice period, the buyer’s obligation to inform the seller of a claim, and the seller’s right to participate in or control the defence of a pre‑closing tax matter. Trigger the notice mechanism promptly on receipt of any relevant notice, because late notification can prejudice the claim. Preserve all documents from the diligence exercise, as they form the evidential foundation for defending the assessment.

Common dispute resolution timetables

Map the escalation route for each live matter: adjudication or assessment, first appeal, the Income‑tax Appellate Tribunal (or the appellate tribunal for indirect taxes), and, where a substantial question of law arises, the High Courts and Supreme Court. Confirm the current procedural timetable and limitation for filing each appeal, and diarise every deadline. Agree a defence‑funding mechanism in the indemnity so that neither party is financially disincentivised from mounting a proper defence, and set a threshold above which settlement requires joint consent.

Comparative table, buyer vs seller: who bears which tax risk

Practical action plan: pre‑sign, pre‑close and post‑close timeline

1. Pre‑sign. Instruct counsel, agree materiality, open the data room, run the master checklist across all four regimes, and populate the red‑flag register with quantified exposures.
2. Pre‑close. Finalise quantification, negotiate warranties, indemnities, caps, baskets and survival, size the escrow, obtain outstanding disclosures, and lock down the disclosure letter.
3. Closing. Confirm continuity of registrations and tax attributes, execute escrow arrangements, and record the agreed conduct provisions for tax claims.
4. Post‑close. Preserve diligence records, diarise all appeal and audit deadlines, monitor for reopened years, and trigger the indemnity notice mechanism promptly on any relevant notice.

Conclusion and next steps

A disciplined m&a tax due diligence india process is the difference between a deal priced on evidence and a deal exposed to surprise liabilities. As the Income‑tax Act, 2025 and its accompanying rules take effect, the way exposures crystallise and are defended is evolving, so the 2026 playbook integrates income tax, GST, customs and transfer pricing into a single, checklist‑driven workflow supported by robust warranties, indemnities and a post‑closing dispute plan. Buyers should quantify and allocate; sellers should disclose and pre‑empt; both should instruct experienced controversy counsel early.

Run the master checklist, populate the red‑flag register, size the escrow to the downside, and preserve the evidence, because m&a tax due diligence india only delivers value when its findings are converted into enforceable protection. For a transaction‑specific review, engage counsel with cross‑regime tax controversy experience.

Sources

1. Income‑tax India, official acts & rules portal
2. Central Board of Direct Taxes (CBDT), Notifications & Circulars
3. Central Board of Indirect Taxes & Customs (CBIC)
4. Goods & Services Tax Portal
5. OECD Transfer Pricing Guidelines
6. Supreme Court of India
7. Directorate General of Foreign Trade (DGFT)
8. Bar Council of India
9. Gazette of India