Direct tax collections grew 5 percent in FY26, well below the revised budget estimate of 11 percent, prompting the government to reassess its 15 percent growth projection for the current year, officials told Moneycontrol.
The officials said the FY27 direct tax target of Rs 26.97 lakh crore now appears difficult to achieve, with slower nominal GDP growth adding to the challenge.
The revised estimate for FY26 direct tax collections was Rs 24.21 lakh crore, but actual collections were Rs 23.39 lakh crore, data released on May 4 showed. The miss was led by a Rs 70,000 crore shortfall in income tax, with corporate tax collections lower by about Rs 10,000 crore.
Moneycontrol had reported on April 8 that the Centre missed its direct tax collection target for FY26 due to a decline in income tax collections.
The FY27 Budget assumed nominal GDP growth of 10 per cent in the current year for its estimates. It has pegged direct tax collections growth at 11.4 percent, targeting a buoyancy of 1.1.
However, due to a decline in actual collections, the growth in direct tax collections for FY27 is now projected at 15.3 percent over FY26. And expected buoyancy now is 1.5.
“This is far more than the assumptions made in the Budget. The external environment is weighing on growth numbers. It’s likely that this year’s target may be missed as well,” one government official told Moneycontrol.
In FY26, the buoyancy in direct tax collections stood at only 0.6 percent.
“A lower nominal GDP trajectory typically translates into weaker tax collections. Early FY27 data showing around 5 percent growth in direct taxes, against the required 11-12 percent, reflects this shift in macro conditions,” the second official said.
Lower nominal GDP growth typically reflects slower growth in corporate revenues at current prices, which can weigh on profits and, in turn, reduce corporate tax collections. When companies generate lower profits, wage hikes are typically lower, which also leads to a dip in income growth and income tax mop-up.
“Direct taxes are likely to underperform as both corporate profitability and personal income growth weaken simultaneously. Companies are currently facing cost pressures that squeeze margins, while AI-automation-led slower hiring and lower wage growth have led to moderation in the growth trajectory of personal income tax collections,” an tax expert said.
The officials said that policy decisions have also influenced the Central government’s revenue outlook. The government’s move to exempt income up to Rs 12 lakh under the new tax regime, aimed at boosting consumption and providing taxpayer relief, has had a fiscal cost. “Personal income tax growth slowed to about 2.7 percent in FY26, and the impact is continuing into the current fiscal,” the second official said.
“The growth in FY 2026 in direct tax collections is despite reduced tax rates and global head winds including supply chain disruptions. Hence, even the small growth is actually a reflection of the resilience of the economy and a sign of stability,” another tax expert said.
“The FY26 data suggests a balanced tax composition with both corporate and individual taxpayers contributing significantly to the exchequer, and the increase in corporate tax collections points to relatively stable profitability across sectors. Looking ahead, the outlook for the direct tax target in 2027 remains positive, provided economic growth and efficient tax collection continue to underpin fiscal objectives,” he added.
Fiscal impact
According to government officials, the emerging gap between tax targets and actual collections will make fiscal management difficult if collections do not improve in the second half.
The challenge to adhere to the capex target and meet fiscal deficit aim of 4.3 percent of GDP for FY27 is compounded by structural pressures. Interest payments account for about 26 per cent of total expenditure and nearly 40 per cent of revenue receipts, limiting fiscal flexibility if revenue growth remains weak, they say.
Moneycontrol had reported on April 23 that the Centre expects higher spending of Rs 50,000 crore-Rs 1 lakh crore in FY27 because of the West Asia crisis, led by increased fertiliser subsidies and higher outlays on select schemes.
Higher-than-budgeted spending could lead to fiscal slippage, with the government expecting the fiscal deficit to rise to 4.5-4.6 percent of GDP in FY27, the officials said.
The Budget has pegged the fiscal deficit target at 4.3 percent on the assumption of 10 percent nominal GDP growth. However, due to GDP re-basing, the same Budget target now stands at 4.46 percent for FY27.
“A 10 basis point increase in fiscal deficit (4.6 percent) from 4.5 percent is very likely, given the pressures the Centre is facing on the fiscal front,” said a senior economist at ICICI Securities Primary Dealership.
