The direct tax collections for FY26 fell short of the revised estimates target of Rs 24.21 lakh crore, by over Rs 10,000 crore, mainly due to a lower-than-expected income tax mop-up, a senior government official told Moneycontrol, adding that indirect tax collections were achieved.
The shortfall in tax revenue has not affected the fiscal deficit, however, and the government has been able to hit its target of 4.4 percent (as a percentage of GDP) in FY26, the official noted.
“There has not been any major compression in either capex or the revenue expenditure side in the previous fiscal,” the official said. “There were also not any significant additional expenses.”
For FY27, the challenge to hit the revenue target is bigger – given there has been excise duty tweaks announced – which will cost the exchequer Rs 5,500 crore every fortnight till it stays.
The fiscal deficit target for FY27 is 4.3 percent, as a percentage of GDP.
Officials believe, direct as well as indirect tax collections can come under stress if tensions remain for a longer period. The Centre has pegged direct tax target for FY27 at Rs 26.97 lakh crore, and indirect tax at Rs 16.79 lakh crore.
The gross tax revenue for FY27 is pegged at Rs 44.04 lakh crore, and for FY26, it was set at Rs 40.78 lakh crore.
“For now, the assessment is that the pressure is manageable, but a prolonged disruption could weigh on revenue collections going forward. We will have a clearer sense of the income tax collection trend for the year once the first advance tax instalment comes in by June 15,” another government official said.
Tax experts say that the spectre of raising tax collections in the face of slowing economic conditions could be challenging. While most indications seem to point to only a short pause, a lot will depend on how quickly the Middle East crisis resolves and the price of oil rationalizes, they say.
“The full impact of the rate cuts on income tax and GST appear to be already been priced in. Overall the shortfall this year dwarfs in the context of the total tax collection but still is an indicator that growth in tax revenues comes from economic expansion and the government needs to constantly work on this, including attracting more global capital flows,” an tax expert said.
FY27 fiscal pressures
Officials indicate that “the expenditure impact of the Iran conflict will be visible in FY27”.
“That is where the real pressure on the fiscal will emerge, as some of these costs will have to be absorbed in the current financial year. At the same time, there is a recognition within the government that several recent policy measures have fiscal implications,” the second official noted.
“A number of relief measures have been announced across sectors, including customs duty exemptions on petrochemical products and other items. These steps are necessary from a policy standpoint, but they do come at a cost. It does create an additional burden on the Finance Ministry, and we are closely monitoring how this evolves,” the person added.
Officials say that it’s still too early to clearly assess how additional fiscal space will be created to meet emerging requirements in FY27. “There are no easy answers at this stage, and multiple variables are still playing out. By mid-April or April end, we expect to have a clearer indication of how things are shaping up on the expenditure side. That should give us better visibility on the fiscal trajectory for the year,” said the first person.
Economist, at BJP said: “As a result of fiscal consolidation by PM Modi’s government, the fiscal deficit has been reduced from 9.2 percent during COVID years to 4.4 percent in FY26. This creates fiscal space for aborbing any potential inflated subsidy bill for supply of subsidised commodities to the poor and farmers despite the possibly higher energy prices and rupee depreciation.”
