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Informist, Friday, Sept. 19, 2025

 

By Priyasmita Dutta

 

NEW DELHI – The government may miss its direct tax mop-up target of INR 25.20 trillion for the financial year 2025-26 (Apr-Mar) by over INR 1.50 trillion if the collections continue to grow at the current pace, a deep dive into data released by the finance ministry Thursday shows. This assumption, however, is optimistic as there remains the risk of lower growth in direct tax collections considering refund generation may go up in the second half of the year, experts said.

 

As per data released by the finance ministry Thursday, the government's net direct tax collections grew 9.2% on year to INR 10.83 trillion between Apr. 1 and Sept. 17 as against a growth of 12.7% assumed in the Budget for FY26. A back-of-the-envelope calculation shows that if the government's net direct tax collections continue to grow at 9.2% for the full year, the total tax collected will be to the tune of INR 23.69 trillion, INR 1.50 trillion lower than the Budget estimate for FY26.

 

According to Madhavi Arora, chief economist, Emkay Global Financial Services, the Budget had assumed a tax buoyancy of 1.1, and to meet the Budget estimate, the government's tax buoyancy would have to double, "which looks difficult". Tax buoyancy of over one implies that tax revenues will increase quicker than nominal GDP growth. The nominal GDP for FY26 assumed in the Budget was 10.1%, with gross tax collections seen growing 10.8% to INR 42.70 trillion.

 

A major part of the government's gross tax collections comes from direct taxes--personal income tax and corporate tax collections--which are estimated to grow 10.4% and 14.4% on year, respectively. The data for FY25 showed that the government missed the revised direct tax aim by INR 673 billion owing to a shortfall in personal income tax collections. This means for the government to meet the target for this year, direct tax collections will have to grow at a higher-than-budgeted pace of 16.1%.

 

"The risks of tax collections undershooting the Budget estimates remain strong, more so with actual collections last year undershooting the revised estimates," Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, told Informist.

 

"Income tax collections, which have been growing steadily in the past, are definitely much weaker this year, and that is only partly on account of income tax cuts," he said. In the Budget for FY26, the government had assumed personal income tax collections would grow 14.4% on year, but given that the government missed the target in FY25, collections will have to grow a whopping 21.6% to meet the Budget estimate of INR 14.38 trillion.

 

One of the key takeaways from Finance Minister Nirmala Sitharaman's eighth Budget speech was the hike in the tax rebate limit to INR 1.2 million, effectively meaning that individuals with income of up to INR 1.2 million per annum would be exempted from paying any income tax. The move was aimed at increasing disposable income in the hands of taxpayers to spur demand. The changes in income tax will result in a revenue loss of INR 1 trillion per annum, Sitharaman had said at the time of announcing the tax bonanza.

 

The Central Board of Direct Taxes has discontinued the practice of giving data on personal income tax collections on a monthly basis, but non-corporate tax collections--a majority of which is made up by personal income tax collections--grew 13.7% on year to INR 5.84 trillion during Apr. 1–Sept. 17.

 

Although the 13.7% on-year growth appears robust, experts remain unimpressed as generation of refunds--which leads to a huge arithmetical difference--is a sharp 23.9% lower on year. The finance ministry had extended the deadline to file income tax returns for the assessment year 2025–26, or FY25, by 46 days to Wednesday from Jul. 31. "Because of the change in the date to file returns, refunds processing has actually tracked lower, so growth in net tax collections may be a bit exaggerated currently," Upadhyay said.

 

If we assume that the current direct tax growth of 9.2% on year is exaggerated, and that the government's tax collection growth eventually moderates to 5% on year during FY26, the tax shortfall will be huge--to the tune of INR 2.41 trillion. On the other hand, if we assume that collections improve slightly to 10% on year, the government's direct tax collections will be INR 1.33 trillion short of the Budget estimate. And in case the direct tax collections grow at a robust 15%--nearer to the growth of 16.1% needed to achieve the Budget aim--the shortfall will only be of INR 248 billion.

 

Arora said there have been cases in the past where revenue collections have been slower in Apr-Sept with improvement seen in the latter half of the year. "Although, yes, there are risks to meeting the Budget growth figure... it could be a challenge," she said.  End

 

Edited by Rajeev Pai

 

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