With the Centre’s gross tax revenues (GTR) in the first seven months of FY26 growing by just 4%, analysts fear full-year collections could fall short of Budget Estimates (BE) by as much as Rs 1.5 lakh crore, or about 3.5%. This would mark a significant setback to the government’s effort to narrow the widening “tax gap” by raising the tax-to-GDP ratio.
In recent years, the Centre had managed a modest improvement in this ratio—from 11.3% in FY23 to 11.7% in FY25—but it now appears poised to slip again, well short of the 12.1% peak achieved in FY08, which the Budget had hoped to approach. If the medium-to-long-term objective is to lift combined tax revenues of the Centre and states from roughly 18% of GDP to a more desirable 25%, both tiers of government will need to sustain tax growth well above the pace of GDP expansion before stabilisation can occur.
The current deceleration in tax collections is sharper than what the slowdown in nominal GDP growth alone would suggest. The Budget had assumed a tax buoyancy of 1.2 for FY26, up from 1 in FY25. In reality, buoyancy appears to be barely half that level. This is partly by design.
Boosting disposable income
The government has deliberately pulled policy levers to boost disposable incomes. Tax relief, earlier concentrated in the corporate sector, has been extended to households in the hope of reviving consumption. While the liberal personal income tax (PIT) concessions were built into the Budget arithmetic, the subsequent, wide-ranging goods and services tax (GST) rate cuts were not.
The impact on GST collections has been swift. Rate cuts on a broad range of daily-use and durable goods led to a 4% year-on-year contraction in gross GST receipts in November—the first full month reflecting the revised rates. Although transaction volumes rose an additional 7-8% in September–October, this was insufficient to offset the rate effect. As a result, November collections were 10.7% lower than in October.
PIT revenues, which had been growing at a scorching pace in recent years —making taxes on individual incomes the single largest source of revenue—have also slowed sharply. After surging by an unprecedented 25.4% in FY24 and a healthy 20% in FY25, PIT growth plunged to just 4.7% in the first half of FY26.
India’s tax policy framework
To be sure, India’s tax policy framework has gained considerable predictability in recent years, anchored in the belief that moderate rates and a broader base yield better outcomes. Yet the distribution of income between the corporate and household sectors remains deeply skewed. Corporate balance sheets show record-high returns on capital employed, while household incomes—especially in the informal sector—have stagnated in real terms.
This imbalance helps explain why the government’s recent “tax effort” appears to have reached a plateau. A key driver of the earlier surge in PIT collections was the extraordinary flow of household savings into equity markets. Capital gains tax now raises about Rs 1.5 lakh crore annually and is the fastest-growing component of tax revenue.
There may be scope for further increases in capital gains taxation—last raised in FY25—given its role in exacerbating inequality. Looking ahead, the FY27 Budget may also need to consider rarely used instruments such as an inheritance or estate duty to lift the tax-to-GDP ratio. A carefully designed levy on farm income above a high threshold, long avoided for political reasons, also warrants serious debate.