With the Union Budget for 2026-27 set to be presented on February 1, economists have projected gross tax revenue (GTR) growth for FY27 around 11%, anticipating a moderate rebound from the subdued performance in the current financial year (FY26). A slowdown from the 12.5% GTR growth originally projected for FY26 is widely expected.
The somewhat optimistic outlook for FY27 largely depends on a strong rebound in nominal gross domestic product (GDP) growth to its long-term trend of 10.5–11% in FY27, economists stated, compared with the estimated ~8% nominal GDP growth for FY26 (as per recent first advance estimates with real GDP growth at 7.4%).
That represents a tax buoyancy of around 1, as compared to 1.1 projected for the current fiscal. Buoyancy in FY26 may turn out to be significantly below the projected levels, due to the income tax and GST cuts. Economists note that since taxes are levied on nominal values rather than real output, faster nominal GDP growth typically boosts collections.
What do economists say?
DK Joshi, Chief Economist at Crisil attributes the expected nominal GDP rebound in FY27 primarily to inflation normalisation and projects real GDP growth at 6.7% for FY27.
Madhavi Arora, Chief Economist at Emkay Global, projects GTR growth at 11–11.5% for FY27, assuming nominal GDP growth of around 10% and tax buoyancy remaining close to 1–1.1x (meaning tax revenues grow roughly in line with or slightly faster than the economy).
However, Gaura Sen Gupta, Economist at IDFC First Bank, offers a more conservative view, projecting GTR growth at just 8% for FY27 alongside 10% nominal GDP growth, implying tax buoyancy falling to 0.8x (indicating tax revenues growing slower than the economy). She attributes this primarily to the full-year impact of recent Goods and Services Tax (GST) rate cuts. She adds that the Budget may nonetheless project slightly more optimistic numbers.
For FY26, Sen Gupta estimates actual GTR growth at 5.4–6%, reflecting misses on both income tax and Central GST collections. She forecasts a shortfall of nearly Rs 1.5 lakh crore in Central GST, partially offset by surplus collections from the GST compensation cess.
GST compensation cess
The GST compensation cess, originally introduced in 2017 to offset state revenue losses during GST rollout and later extended to repay Covid-era borrowings, is being discontinued effective February 1 for remaining categories like tobacco products, with replacement levies such as additional central excise duty on tobacco and a new health/national security cess on pan masala.
A report from HDFC Bank projects tax buoyancy at 1.1x for FY27 (versus a projected 0.64x in FY26), with nominal GDP growth at 10.1% and GTR growth at 11.7%. It also forecasts a debt-to-GDP ratio of 55.1% in FY27 and a fiscal deficit of 4.2% of GDP.
Sakshi Gupta, Principal Economist at HDFC Bank, estimates a shortfall of Rs 3.4 lakh crore in GTR for FY26 overall. The government had targeted GTR of Rs 42.7 lakh crore for FY26, comprising direct taxes of Rs 25.2 lakh crore and indirect taxes of Rs 17.4 lakh crore. HDFC Bank report projects a Rs 2.2 lakh crore shortfall in direct taxes and Rs 1.1 lakh crore in indirect taxes.
Overall, while FY26 has seen softer tax buoyancy due to rate cuts and lower nominal growth, economists expect a recovery in FY27 driven by higher nominal GDP momentum though views vary on the exact pace and the lingering effects of GST reforms.