India’s gross tax collections in FY26 are expected to fall short of the budgeted target by about ₹3 lakh crore, after rising just 3.3% year-on-year in the first eight months of the fiscal, according to a fiscal outlook report by CareEdge Ratings.
The weakness in tax collections has been driven largely by indirect taxes. GST collections contracted 2% during April–November FY26 following rate rationalisation implemented in September, while customs duty collections also declined. Union excise duties, however, recorded healthy growth, providing some support to overall indirect tax revenues.
In contrast, direct taxes have been relatively more resilient.
SBI Research noted that the contribution of direct taxes to total tax revenue is budgeted at 59% in FY26, the highest share in the last 15 years, while the share of indirect taxes is expected to decline to 41%. The slowdown in tax collections, therefore, is concentrated primarily in indirect taxes rather than direct levies.
SBI Research further highlighted that personal income tax (PIT) collections have been growing faster than corporate tax collections since FY21, reflecting a sustained rise in formal employment and individual tax compliance. Corporate tax growth, while improving in recent months, has remained uneven amid moderation in profits across some sectors.
The tax shortfall has been partly offset by a sharp rise in non-tax revenue, which increased 20.9% during April–November FY26, supported by higher-than-expected dividend transfers from the Reserve Bank of India. Disinvestment proceeds, however, remained subdued at ₹49 billion against a budgeted ₹470 billion, with key stake sales likely to spill over into FY27.
On the expenditure front, revenue spending growth remained muted at 1.8% in the first eight months of FY26, while capital expenditure rose 28.2%, achieving nearly 59% of the annual target. CareEdge expects the Centre to meet its FY26 capex target of ₹11.2 trillion and projects capital expenditure to rise further to ₹12.3 trillion in FY27, maintaining a capex-to-revex ratio of around 0.3.
CareEdge estimates the fiscal deficit for FY26 to remain contained at 4.4% of GDP, marginally above the budgeted level, aided by strong non-tax receipts and restrained revenue expenditure. For FY27, the fiscal deficit is projected at 4.2–4.3% of GDP, with gross borrowing expected in the ₹16–17 trillion range.
Looking ahead, CareEdge projects gross tax revenue growth of 9.6% in FY27, broadly in line with nominal GDP growth, supported by a recovery in direct tax collections, even as GST rate rationalisation continues to weigh on indirect taxes. The report said the fiscal outlook for FY27 remains balanced, with investment-led spending and improving revenue trends expected to support consolidation efforts.
