Union Budget 2026 needs to focus on widening the direct tax base, incentivising private sector investment and freezing peak direct tax rates to further accelerate growth and generate employment opportunities, a report said.
Recent reforms under GST 2.0 have demonstrated that simplification and tax moderation can coexist with strong revenue growth, challenging the long-held belief that higher tax rates are necessary to boost collections, a report titled “Shaping India's New Taxation Ideology: Simplification, Moderation and Growth” said.
"As India approaches the Union Budget, the choices made will determine whether taxation becomes a catalyst for long-term economic expansion or a constraint on ambition," the report released by think tank Think Change Forum (TCF) said on Wednesday.
The report outlines a six-point advisory for policymakers, urging them to extend the principles of GST reform to direct taxes, enforcement and investment policy. At the core of the advisory is a push for policy certainty and compliance-led growth anchored in freezing peak tax rates, widening the direct tax base through technology instead of rate hikes, steering clear of MRP-based taxation after the compensation cess sunsets, completing the GST input credit chain, incentivising productive reinvestment of profits and stepping up action against the parallel economy, including smuggling and illicit trade.
The Union Budget should commit to freezing peak direct tax rates in line with the Arthashastra's principle of moderation to provide long-term certainty and shift revenue mobilisation towards base expansion rather than rate increases, the report said.
There is an urgent need for widening direct tax base to improve tax GDP ratio, it said, adding that with only 2.5-3 crore effective taxpayers in a population of 140 crore, the Budget should prioritise technology-driven base expansion by integrating GST, income tax and high-value consumption data instead of raising rates.
The report also flagged a growing investment paradox in the Indian economy. While corporate profitability has improved over the past decade, investment-to-GDP ratios remain well below their pre-2011 peak, suggesting that profits are increasingly being channelled into financial assets rather than productive capacity, it said.
Given the stagnant investment despite rising profits, the Budget should use targeted tax incentives to channel corporate earnings into manufacturing, R&D and job-creating assets rather than financial investments, said the report.
The Budget should also outline a phased roadmap to bring petroleum, electricity and other excluded inputs under GST to restore tax neutrality and reduce cascading costs for industry, it said. The upcoming Budget must strengthen enforcement against smuggling, illicit trade and tax evasion so that non-compliance becomes costlier than compliance and honest taxpayers are no longer penalised, it added.
The report emphasised the need for a distinct Indian taxation ideology, one that blends classical Indian wisdom with modern economic thinking, prioritising moderation, fairness, compliance and growth over short-term revenue extraction.
Also read: Govt committee to streamline tax, export issues in manufacturing
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