Question mark over Centre’s revenue target

That there is a shift in the way the Centre is managing its fiscal balance this year is evident. From being extremely cautious about protecting and growing revenue and being quite frugal in its revenue spends, to giving large tax cuts which will put the fisc under duress, the Centre is swinging in the opposite direction.

Of course, desperate times call for desperate measures. At a time when the US has slapped 50 per cent tariff on imports from India and there are expectations that the GDP growth this fiscal year could be lowered by 30 to 60 basis points due to this move, the Centre’s fiscal giveaways appear well timed. They will not only help buoy sentiments, but they can also drive consumption growth.

The large cut in income tax rates in the Union Budget this year was one such measure which was intended to place more money in the hands of the salaried class so that they spend more and support growth. The GST rate rationalisation, if implemented by this festive season, will also drive consumption and give a leg-up to the economy.

While the positive impact of these major tax overhauls cannot be denied, there is certain short-term cost to be paid due to these fiscal giveaways. Tax revenue collection is likely to be lower this fiscal due to the lower income tax and GST rates as well as lower corporate tax collections. Notwithstanding the higher RBI dividend, the deficit could expand this year.

The hit on income tax

The first indication that there could be a hit on tax collections this year was received in the direct tax collection data from CBDT.

This data shows that income tax collection is down sharply in the first four months of this fiscal year. While tax from individuals, HUFs, partnerships, etc., amounted to ₹4.45 lakh crore between April 1 and August 11, in 2024, the figure dropped to ₹4.12 lakh crore in the same period this fiscal year, recording a decline of 7.5 per cent.

This does not spell good news as income tax was the fastest growing segment in direct taxes, registering a growth of 25 per cent in FY24 and 20 per cent in FY25. The Centre had budgeted growth of 14.4 per cent in FY26 in income tax collections, which is much higher than the budgeted growth of around 10 per cent for corporate tax and GST.

Through a combination of expanding the tax base, simplifying compliance and reduction in tax rates, the Centre had been able to grow the income tax collections at a strong rate over the last four years. This robust growth had, in fact, been mitigating the tepid growth in customs and excise duty collections in recent past.

The IT collections are unlikely to achieve the budgeted growth this fiscal year since the income tax cuts in this Budget were extremely generous.

People with income up to ₹12.75 lakh a year do not have to pay any income tax. In addition, the adjustments in tax slabs have ensured large savings for those earning income between ₹12 lakh and ₹24 lakh per annum as well. For instance, the tax saving for someone earning ₹16 lakh per year is ₹56,000 while those earning ₹20 lakh, save almost ₹93,600.

With almost 60 per cent of income tax collections coming from salaried individuals, these giveaways could pinch more than the Centre’s estimate of ₹1 lakh crore revenue loss this fiscal year.

GST upheaval

As if the dramatic changes in income tax rates were not enough, some large cuts in GST rates are also being proposed as part of the GST rate rationalisation. As the 12 per cent and 28 per cent slabs are removed, most of the items in these slabs are expected to move to the slab just below.

This implies that items such as butter, ghee, cheese, processed food items, building and construction material and computer and mobile accessories can be taxed at 5 per cent instead of 12 per cent. More importantly, small cars, air conditioners, cement and high-end electronic items can move to 18 per cent slab from 28 per cent.

Most research houses expect the rationalisation to result in reduction in tax collection of about ₹1-1.2 lakh crore per annum. Since the implementation is likely to be in the second half of this year, the impact this year is expected to be between ₹40,000 crore and ₹50,000 crore.

It is moot if there will be an immediate boost to consumption due to the income tax or GST rate cuts due to other headwinds such as uncertain external environment, IT sector slowdown, and margin pressures being faced by companies, impacting thereby employee payouts.

On the other hand, if there is delay in implementation of the rationalisation proposal, there could be a large hit to GST revenue with consumers postponing their purchases of white goods, electronics or cars until the new GST rates are announced.

Other hits to the fisc

Besides the above, corporate tax collections also grew at a tepid 2.9 per cent in the first four months of this fiscal. These collections had grown at a rather weak rate of 7.6 per cent in FY25 and can find it difficult to grow at the budgeted rate of 10.4 per cent in FY26. Listed companies have reported the weakest earnings growth in the last two years, in the June 2025 quarter. With profitability of banks getting hit due to compression in net interest margins, IT companies in a sluggish growth phase, consumption to slow due to the upcoming GST rationalisation and exporters taking a knock, corporate tax collections could also fall short of the budgeted target.

Securities transaction tax collections, which had been growing at a fast clip along with the soaring trading activity on the bourses, could slow down as the regulator clamps down on excessive speculation.

The reduction in number of weekly index options has already had an impact on trading activity this fiscal.

The list of woes for the Revenue appears endless this year. As if these were not enough, when online real money games were banned this week, the MeitY Secretary told businessline that GST collected from these activities amounted to ₹15,000 crore in FY24, and that the Finance Ministry had agreed to forego this revenue.

Disinvestment is not going to be easy either given the uncertain business environment and weakness in the stock market.

The trouble is that there isn’t much room to cut expenditure either. The government must spend on capex since the private sector is postponing its capital investments due to the trade related uncertainty and there is limited room to cut revenue expenses further. This may just go down as one of those turbulent years in history when the fiscal deficit number ceases to matter.

Published on August 30, 2025