India's corporate sector needs to participate in demand creation by giving more money to their employees or hire more people, says Tuhin Kanta Pandey, Finance Secretary or Secretary of Revenue, Ministry of Finance.
Pandey, in an interview with Outlook Business, says that tax benefits to the corporate sector was provided in expectation that companies would pass on the gains to their employees."If you are raising productivity, then wages must also reflect that growth. You can’t say I will increase productivity but I will not increase the wages," he adds.
In this interview, Pandey discusses the key changes in direct and indirect taxes introduced in the Union Budget 2025-26.
Edited Excerpts:
What is the economic rationale behind the direct tax changes?
From an economic perspective, we need to restructure the system. With the introduction of a new income tax bill, we aim to make the structure more forward-looking. Our tax rates now follow a gradual progression—5 per cent, 10 per cent, 15 per cent, and 20 per cent, whereas earlier, there was a steep jump from 20 per cent to 30 per cent. We introduced the 25 per cent slab to smoothen this transition. Additionally, in previous slabs, differences varied between 2 and 3; we have now standardised it to a uniform 4.
The 0–3 lakh slab was fixed long ago. If we revise it to 0–4 lakh, many taxpayers won’t even need to file returns. However, filing returns instils financial discipline, so those above this threshold need to file and claim a rebate, which is refunded automatically. The new regime is much simpler—taxpayers don’t need advisors, just basic inputs. Over 75 per cent have already migrated to this new system, and the remaining will also come after this.
This is a structural tax reform, providing a stable framework that doesn’t require annual changes. Additionally, we believe in giving money back to taxpayers, addressing the perception of excessive taxation. The idea is for people to spend, save, and invest, which in turn stimulates the economy.
Isn’t the move contrary to your fiscal strategy of bringing more people into the tax net?
The key point here is that we recognise the importance of broadening the tax base rather than repeatedly taxing the same individuals. If the government has set an exemption limit of Rs 12 lakh, it reflects a conscious decision not to tax incomes below that threshold. Otherwise, by the same logic, we could have reduced the exemption limit to Rs 5 lakh instead of Rs 7 lakh—but that wouldn’t serve the larger objective.
The focus should be on bringing new taxpayers into the system and ensuring that incomes are rising. If incomes are not rising, then there is something wrong. This is why we are also indirectly telling corporates that please raise wages. When we provide tax benefits to businesses, we also expect them to pass on some of those gains to their employees.
Cost of living is also rising significantly and the corporate sector says there is not enough demand in the market…
And I say you (corporate sector) should also participate in demand creation by giving more money to your employees or hire more. If you are raising productivity, then wages must also reflect that growth. You can’t say I will increase productivity but I will not increase the wages.
What gives you confidence that this indirect approach will drive the corporate sector to scale up investments, when the direct incentives in 2019 failed to do so?
We are aiming to stimulate economic activity by seeding new ideas. And these ideas should grow. It’s not just about maintaining our current trajectory—we must also look ahead. This approach is not coming at the cost of capital expenditure (capex). Instead, we believe that the money returned to taxpayers will generate more economic momentum than if it had remained with the government.
At the same time, we are ensuring fiscal prudence. By reducing the fiscal deficit, we are creating space for the private sector to access funds without being crowded out. If the government borrows excessively, it limits the private sector’s ability to raise money through bonds or other instruments. We are avoiding this by keeping borrowing levels stable even as the economy grows by 10 per cent.
This is a non-inflationary strategy. We are not artificially stimulating demand by expanding the fiscal deficit but rather boosting consumption while maintaining strong capex growth—17 per cent over the revised estimate. Now, the key is how taxpayers respond. If they use this money wisely—spending, saving, and investing—it will validate our approach.
If investments don’t happen, then would you consider withdrawing the tax reductions given to the corporate sector?
It is not necessary because they will do it. The key factor is initiative, and we see that initiative already in motion. We are encouraging this momentum, and as spending picks up, corporate sentiment remains strong. From our interactions with industry leaders and chambers of commerce, the outlook is positive. There is an evident sense of enthusiasm and optimism among businesses, reflecting confidence in the direction we are taking.
Why doesn’t the enthusiasm shows in numbers?
It will show up. Many people are sitting on the fence.
The upper and upper-middle section of taxpayers express disappointment over quality of life. How do you address their concerns?
The quality of life is improving rapidly—you can see it in better roads, enhanced connectivity, and a far more efficient logistics network than a decade ago. Investments in railways, freight corridors with double-decker trains, faster container movement, and the expansion of warehousing, including hub-and-spoke models with India Post, are driving this transformation.
The Centre is actively working with states, ensuring that capex and reforms go hand in hand. The 50-year special assistance loan to states has a portion allocated through a fixed formula, while the rest is linked to reforms. By tying funding to reform initiatives, the government is encouraging both infrastructure development and systemic improvements.
States play a crucial role, particularly in social sectors like education and healthcare. Many are making significant investments, and their impact is visible. Since state governments manage thousands of schools, colleges, and hospitals, their contribution to social development is substantial. However, it remains essential to ensure that we have the bang for the buck.
Since the time of its implementation, the Goods and Services Tax (GST) system has seen reforms at a sluggish pace due to technical and political reasons. In that case, how will the relief be extended to indirect taxes?
A lot is riding on GST in terms of revenue, and rationalisation will inevitably mean adjustments—some rates may go up, while others may come down. The key challenge is striking a balance: if every rate were to be reduced, multiple slabs would persist. To streamline the structure, some lower rates may need to rise to bring everything to a midpoint.
The real question is whether such adjustments will be acceptable. Those currently benefiting from lower rates may resist any increase, even if it leads to a more simplified tax system. Additionally, consensus among all governments is crucial. However, with the experience gained over the years, there is now a clearer understanding of how to navigate these changes collaboratively.
By slashing import duties, do you intend to say the industry is ready, or asking the industry to gear up?
The policy stance is becoming clearer, and the focus is shifting toward efficiency, innovation, and competitiveness. Businesses must move away from complacency—becoming "lazy" in a competitive landscape is not an option.
Consumer benefits must also be realised. If efficiency-driven cost reductions don’t materialise, people may wrongly blame GST rather than deeper structural issues. I think everyone must contribute, embracing a "we" approach rather than seeing Viksit Bharat as merely a government vision.
Both industry and government have roles to play. While businesses must enhance productivity, cut costs, and adopt new technologies, the government must continue improving ease of doing business, reducing regulatory burdens, and strengthening infrastructure.
Has there been a review of the Atmanirbhar vision which was aggressive about reducing reliance on imports?
Nothing works in isolation today. If India lacks critical minerals, it must import them—and doing so at high duty rates makes little sense. The success of mobile manufacturing in India came from initially allowing key components to be imported. As domestic production scaled up, dependency on imports naturally reduced.
The same principle applied to building India’s auto industry. A phased approach is essential—temporary import flexibility enables local ecosystems to develop. To support this, India needs a non-inverted duty structure: raw materials should have the lowest duties, intermediates should be moderately taxed, and final goods should face the highest tariffs.
