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Informist, Saturday, Jan. 24, 2026

 

By Priyasmita Dutta

 

NEW DELHI – The government is likely to miss its tax collection target for 2025-26 (Apr-Mar) by as much as INR 2 trillion, with both direct and indirect tax collections trailing the growth assumed in the Budget. The shortfall in collection of direct taxes alone, which is the biggest component of the government's total tax revenue, and the driver of strong revenue in the last few fiscal years, is expected to be INR 1.5 trillion, based on latest available data for eight months and the trend of collection in the last four months of the year across the last three fiscal years. The actual shortfall in total tax collections is likely to be higher than INR 2 trillion, given the cuts in goods and services tax that took effect in September.

 

The government's indirect tax collection, particularly from GST, is also likely to miss the Budget estimate by a mile. Based on the collection trend, the government's Central GST collections are likely to be INR 400 billion lower than the target. This number does not include the impact of the sweeping GST rate changes that took effect from Sept. 22 and as such, the shortfall is likely to be even higher. 

 

Considering the government effectively shares around 35% of central taxes with states, the net impact to the FY26 fiscal deficit from tax revenue shortfall is likely to be around INR 1.3 trillion. This size of a miss on revenues would raise concerns about slippage, but the Budget math is still most likely to hold up as the government has a quite a few options that will help it meet the fiscal deficit target, according to analysis of data by Informist.  

 

Higher than estimated non-tax revenue collection and higher than estimated collection from small savings schemes will ensure the government has enough money to cover its expenses and there is no slippage on the fiscal front. On top of that, lower than estimated expenditure for the year and the higher nominal GDP reported in the previous financial year will provide an additional buffer to the government, ensuring there is zero chance of slippage and indeed possibly provide a positive surprise when Finance Minister Nirmala Sitharaman presents her ninth budget on Feb. 1.

 

Hence, there is no chance that the government will have to borrow more by issuing government securities to the market, especially given that it cut its gross borrowing for the second half by INR 100 billion in September to INR 14.72 trillion from INR 14.82 trillion projected in the Budget.

 

The government's fiscal deficit for Apr-Nov, the first eight months of the fiscal year, was INR 9.77 trillion and this accounted for 62.3% of the Budget estimate. Meanwhile, total expenditure was INR 29.26 trillion during Apr-Nov, 57.8% of the Budget estimate. Total receipts were INR 19.49 trillion, 55.7% of the full-year target.

 

Economists agree there is no risk of slippage on the fiscal deficit. "We do not expect a fiscal slippage over the targeted 4.4% of GDP, as higher-than-budgeted non-tax revenues and likely expenditure savings would provide a buffer against the expected miss on taxes," Rahul Agrawal, senior economist at ICRA Ltd., said in a recent note.

 

THE PROBLEM

The government collects nearly 60% of its tax revenues from direct taxes, which is likely to be INR 1.5 trillion short of the target in FY26. In each of the last three financial years, the government has collected, on an average, around 45% of the full-year's collection in the last four months of the year. Based on the same trend, the government is likely to collect INR 23.7 trillion in FY26, as against the Budget estimate of INR 25.20 trillion, a shortfall of INR 1.5 trillion. 

 

As per latest data, the government's direct tax collections – personal income tax collections and corporate tax collections – totalled INR 12.99 trillion in the first eight months of FY26. Based on past three years' trend, the government is likely to collect INR 10.7 trillion during Dec-Mar, which will take the total collections to INR 23.7 trillion for FY26.

 

Within direct tax, the government's personal income tax collections are likely to be INR 1 trillion lower than the Budget estimate of INR 14.38 trillion, as per calculations based on the same trend. The Budget estimate for revenue from income tax, at INR 14.38 trillion, is 21.6% higher than the collection in FY25, even after accounting for the INR 1 trillion loss of revenue on account of the changes to income tax rules. "This is ambitious and it is fair to say there will be significant shortfall in the income tax collections," said Gaura Sen Gupta, chief economist, IDFC FIRST Bank.

 

In the Budget for FY26, Sitharaman hiked the tax rebate limit to INR 1.2 million, effectively meaning that individuals with income of up to INR 1.2 million per annum do not have to pay any income tax. This would result in revenue loss of INR 1 trillion per annum, Sitharaman had said in the Budget. Corporate tax collections, meanwhile, could be INR 500 billion lower than the Budget estimate of INR 10.82 trillion, as per the trend of collections in the last four months in the previous three fiscal years.

 

The math on the indirect tax side is a bit more complicated. 

 

Based on the average of collections for the last three financial years, Central GST collection is likely to be INR 400 billion lower than the Budget estimate of INR 10.11 trillion. Central GST collection in the first eight months was INR 6.36 trillion, and based on the average trend from the last three years, the government is likely to collect another INR 3.3 trillion in the last four months of the year. This means the total collection will be around INR 9.7 trillion, resulting in a shortfall of INR 400 billion. However, the actual shortfall is likely to be significantly higher due to the GST rate changes announced in September.

 

Notably, the pace of GST collections had slowed down in FY26, even before the GST cuts were announced. Cumulatively, GST collections in the first six months of FY26 had grown 9.8% on year to INR 11.93 trillion, over one percentage point lower than the 10.9% growth projected in the Budget.

 

In September, the GST Council overhauled the indirect tax structure. The four slabs of 5%, 12%, 18%, and 28% were collapsed into two slabs of 5% and 18% from Sept. 22. The council segmented the two broad GST slabs on the tenets of 'merit' and 'standard', putting a majority of common-use items in the 5% slab, thereby bringing down the effective average GST rate on such items. A host of white goods, especially consumer durables such as washing machines and big televisions, were moved to the 18% slab from 28%, thereby lowering the average GST rate on these as well. The government has estimated it will lose INR 420 billion annually due to these cuts to the GST structure and rates.

 

Sen Gupta said that after the GST compensation cess is discontinued from Feb. 1, the leftover surplus in compensation cess account, which she estimates at INR 510 billion, is likely to be shared equally between Centre and states. "On a net basis (post tax devolution to state governments) net GST revenue, shortfall is estimated at INR 650 billion," she said.

 

Collection data and the trend of the last three years points to a shortfall of INR 400 billion. The collection in the second half will be lower by INR 210 billion due to the GST revamp and rate cut, as per the government's own estimate of an annual loss of revenue of INR 420 billion on this count. This takes the total GST shortfall in FY26 to INR 610 billion. Even if the compensation cess balance is shared equally with states, the government will add INR 255 billion to its GST kitty and this would still leave a shortfall of INR 355 billion. Indeed, GST collections are crucial to the government. Several estimates peg the revenue loss from the GST cuts at INR 100 billion-INR 120 billion a month. If that were to come true, the government could still be in trouble on its fiscal target.

 

To recap, the GST compensation cess was introduced to bring states on board to adopt the GST regime in 2017. The Centre had promised to protect 14% per annum revenue growth for states for the first five years by levying a compensation cess on certain luxury goods, including motor vehicles, expensive motorcycles, caffeinated beverages, and sin goods such as tobacco items and pan masala. Initially set to expire in June 2022, the cess was extended until March 2026 to repay INR 2.69 trillion in loans taken by the Centre to partly bridge the revenue shortfall of states during the COVID-19 pandemic. 

 

To ensure sin goods are appropriately taxed once the GST compensation cess is phased out, the government has introduced the Health Se National Security Cess, applicable on demerit products, and a hike in excise duty on tobacco products. Both the taxes will be effective Feb. 1. Breaking away from the norm, Sitharaman has said that proceeds from this new cess would be shared with states for health-related schemes. In the last two months of FY26, the government is likely to collect sizeable revenue from this cess and excise duty, although economists are currently unsure about the quantum.

 

THE SOLUTIONS

While the problem seems very large, the solution is indeed simpler and straight forward. The government has three saviours that will help it bridge the tax shortfall in FY26 and the biggest of these is higher than estimated non-tax revenues. Non-tax revenues of the government include dividend from public sector undertakings, dividend from public sector financial institutions (mainly banks), and surplus transfer from the Reserve Bank of India.

 

As per latest data, the government's non-tax revenue was INR 5.16 trillion for Apr-Nov, and based on the average of the trend in the last three years, the government is likely to collect INR 1.9 trillion in the last four months of the financial year. This will take the government's total non-tax revenue for FY26 to INR 7.1 trillion, INR 1.3 trillion higher than the Budget estimate. This will cover up the revenue shortfall almost completely by itself!

 

This high collection is primarily on account of the RBI's surplus transfer as also robust dividend from public sector banks. The central bank transferred a record surplus of INR 2.69 trillion to the government this year, higher than the Budget estimate of INR 2.56 trillion for receipts from both RBI's surplus transfer and dividend from state-owned financial institutions, including banks.

 

"Higher dividends from the central bank, as well as public sector firms and oil companies, will be a key tailwind offsetting slower tax takeaways," Radhika Rao, senior economist at DBS Bank, said in a recent research note.

 

Apart from this large jump in non-tax revenues, the government can also bank on a second option – lower expenditure – to be able to stick to its fiscal deficit target of INR 15.69 trillion. Historically, any reduction in the government's spending has come at the expense of capital expenditure. Economists, however, see room for the government to save on revenue expenditure while sticking to the capital expenditure target. 

 

Based on previous years' trends, the government's total expenditure in FY26 is likely to be over INR 1 trillion lower than the Budget estimate of INR 50.65 trillion. This is without any formal cut in the spending. Latest data shows the government's total expenditure in the first eight months was INR 29.26 trillion and is likely to total INR 20.4 trillion in Dec-Mar, based on the average trend of expenditure in the last four months of the last three fiscal years. That will take the government's total expenditure in FY26 to INR 49.6 trillion, a whole INR 1.05 trillion lower than the Budget estimate. Such lower expenditure will also cover up for most of the shortfall on the revenue front. For reference, the government's expenditure was lower than its Budget estimate by INR 1 trillion in FY25 and by INR 600 billion in FY24.

 

In FY25, the government had lowered the revised estimate for capital expenditure by nearly INR 1 trillion in order to stick to its fiscal deficit target. In the post-COVID era, the Modi government has pressed the accelerator hard on capital expenditure to drive growth in the economy, with the allocation for it reaching INR 11.21 trillion this year, more than triple of what it was six years ago.

 

"In the fiscal year so far, the government has gone slow on revenue expenditure, even while strongly pushing the capital expenditure," Rajani Sinha, chief economist, CareEdge Ratings, said.

 

Sen Gupta said the government is likely to make significant savings under transfer to states – which falls under revenue expenditure – excluding the 50-year interest free loans. "Based on 17 state governments fiscal accounts, grants from Centre are tracking lower by 21.4% YoY in Apr-Nov v/s 19.4% YoY decline last year," she said. "Based on FY25RE (revised estimate), transfer to state governments (excluding loans for capex) was lower than BE by INR 881 billion."

 

Other economists agree the government has enough elbow room and more. "We think the weakness in revenue collections will be fully offset by lower current expenditure, keeping the fiscal deficit at 4.4% of GDP, as budgeted," economists at HSBC said in a note.

 

The government's fiscal math will also remain intact for another reason – nominal GDP growth for FY26

is now estimated at 8?sed on first advance estimates, down sharply from the Budget estimate of 10.1%. This alone would have messed up the government's fiscal math totally. However, the final GDP for FY25 being higher than estimated earlier has not only saved the government a slippage, it has actually created a buffer that the government can rely on.

 

Based on the NSO's first advance estimate, the FY26 Budget assumed nominal GDP would grow 10.1% to INR 356.98 trillion from INR 324.11 trillion in FY25. However, as the final nominal GDP for FY25 has come in higher at INR 330.68 trillion even the lower 8% growth estimated now for FY26 will take the nominal GDP for FY26 to INR 357.13 trillion, which is higher than the INR 356.98 estimate used in the Budget.

 

This effectively rules out the possibility of the government missing its fiscal deficit target for the year due to slower nominal GDP growth as a 4.4% fiscal deficit of the new GDP estimate of INR 357.13 trillion will be INR 15.71 trillion, higher than the Budget target of INR 15.69 trillion. This means the government can overshoot the fiscal deficit target for FY26 by INR 24 billion and still meet the 4.4% target.

 

The government's third saviour that will help it avoid fiscal slippage is the usual suspect – collections under its small savings schemes. These collections are likely to exceed the Budget estimate, data shows. Small savings collections in Apr-Nov were INR 1.98 trillion, accounting for 65% of the Budget estimate of INR 3.06 trillion. Extrapolating the average trend of collection for the last three financial years, collections are likely to be around INR 1.8 trillion during Dec-Mar. This will take the total collection from small savings schemes to around INR 3.8 trillion, nearly 700 billion higher than Budget estimate.

 

Small savings collections play a crucial role in financing the government's fiscal deficit, alongside net market borrowings and drawdowns from cash balances. In FY23, a shortfall in small savings receipts had forced the government to borrow INR 487 billion from the RBI under the Ways and Means Advances limit. The FY26 Budget has projected net borrowing of INR 3.43 trillion from small savings to finance the fiscal deficit, up sharply from INR 1.62 trillion last year.

 

All said, the government's cash balance till December-end is also higher than a year ago, pointing to a comfortable situation. The cash balance was INR 3.44 trillion on Dec. 31, according to calculations made using RBI data, higher than INR 2.56 trillion on Dec. 27, 2024.

 

To sum it all up, while the government stares at a likely tax revenue shortfall of almost INR 2 trillion, with direct tax revenues expected to fall short by INR 1.5 trillion, an increase of at least INR 1.3 trillion on account of dividends and surplus transfer from the RBI, lower expenditure to the tune of INR 1 trillion without resorting to a formal spending cut, and an additional mop-up of INR 700 billion through small savings will ensure the government does not run any risk of fiscal slippage. The FY25 GDP coming in lower than estimated earlier has also lowered the bar for the fiscal deficit in absolute terms and this will also help avoid slippage.

 

Indeed, instead of slippage, the government could be looking at over-achieving its fiscal deficit target if all the three mitigating factors come into play. The total of the excess of non-tax revenue, the expenditure shortfall, and the higher collections through small savings, will add up to INR 3.1 trillion, way above the INR 2 trillion revenue shortfall the government is facing. It remains to be seen whether the government will let this play out and what will be the consequences of this for the FY27 Budget.

 

The following table shows at a snapshot the likely shortfall on tax collection and the buffers the government has which will ensure there is no fiscal slippage. All numbers are in INR trillion.

 

	FY26 Budget Estimate	FY26 Revised Estimate	Shortfall		FY26 Budget Estimate	FY26 Revised Estimate	Overshoot
Income tax	14.4	13.40	-1.0	Non-tax revenue	5.83	7.1	1.3
Corporate tax	10.8	10.3	-0.5	Total expenditure	50.65	49.6	-1.1
Customs	2.4	2.2	-0.2	NSSF collection	3.06	3.8	0.7
Excise	3.2	3.3	0.1
CGST	10.1	9.7	-0.4
Total tax	40.9	38.9	-2.0	Total buffer			3.1

 

End

 

Edited by Avishek Dutta

 

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