Income-tax relief has weighed on near-term revenues but helped lift consumption, with stronger tax collections expected as growth firms up in FY27.
The central government’s tax collections have remained subdued in the ongoing financial year 2025–26 (FY26), with growth trailing budgeted estimates, but are expected to improve in FY27 as demand conditions strengthen, according to a report by CareEdge Ratings.
The report noted that gross tax collections grew by just 3.3 per cent year-on-year during the first eight months of FY26, significantly lower than the budgeted growth of 12.5 per cent. This reflects continued pressure on revenue mobilisation amid slower-than-expected growth in both direct and indirect taxes.
“Direct tax collections have lagged in the year so far, with growth in corporate and income tax collections remaining below the budgeted annual growth,” the report said. While the Union Budget had projected strong growth in both segments, actual collections between April and November FY26 fell short of expectations.
Corporate tax collections rose by 7.8 per cent during the period, compared with the budgeted growth of 9.7 per cent. Income tax collections increased by 6.8 per cent, sharply lower than the budgeted growth of 21.6 per cent, highlighting the extent of the shortfall in direct taxes.
CareEdge said the weak performance of tax revenues has raised the likelihood of a meaningful shortfall against budget estimates for FY26, potentially constraining fiscal flexibility in the near term. Slower growth in indirect taxes has also contributed to the overall weakness in collections.
However, the report struck a more optimistic note for the next fiscal year. On a lower base and with improving nominal GDP growth, GST tax collections are expected to pick up in FY27, aided by better compliance and stronger economic activity. The agency expects the gap between tax growth and nominal GDP growth to narrow in the coming year.
The government, meanwhile, has maintained that recent income tax relief measures, including higher exemption thresholds and rate rationalisation were aimed at boosting household consumption and supporting demand at a time of global uncertainty.
While these measures have weighed on near-term tax collections, policymakers have argued that stronger consumption should feed back into higher economic activity and revenue growth over time.
With the Union Budget approaching, the slowdown in tax collections is likely to sharpen focus on the government’s fiscal strategy of balancing the need to support growth through consumption-led demand while ensuring a gradual return to healthier revenue growth and fiscal consolidation in FY27 and beyond.
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