India’s fiscal arithmetic for FY 2025-26 is facing measurable stress on the revenue side. According to a fiscal outlook assessment by CareEdge Ratings, gross tax collections are likely to undershoot the Budget Estimate by around ₹3 lakh crore, primarily due to softness in indirect tax receipts. However, the medium-term outlook remains stable, with revenue recovery expected in FY 2026-27, supported by direct taxes and non-tax inflows.
From a public finance perspective, the emerging pattern underscores a structural rebalancing of India’s tax mix, rather than a broad-based revenue collapse.
FY 2025-26 Revenue Slippage: The Numbers in Context
CareEdge notes that gross tax collections grew by only 3.3% year-on-year during April-November 2025, a pace materially below nominal GDP growth and Budget assumptions. The shortfall is estimated at approximately ₹3 lakh crore, with the stress concentrated almost entirely in indirect taxes.
This divergence is important: it suggests that the revenue impact is policy-driven rather than cyclical, particularly in the context of recent GST rate rationalisation.
Indirect Taxes: GST and Customs as the Weak Link
GST Collections Post-Rationalisation
GST collections contracted by about 2% during April-November 2025, reflecting the impact of rate rationalisation implemented in September 2025. While the reform aimed at reducing tax incidence and boosting consumption, it has temporarily weakened headline collections.
From a tax-law standpoint, this reinforces a familiar trade-off: rate compression improves compliance and affordability but often entails short-term revenue sacrifice.
Customs and Excise Trends
Customs duty collections also declined during the period, partly due to:
- lower import growth, and
- calibrated tariff adjustments.
Union excise duties, however, recorded relatively healthy growth, providing partial cushioning to indirect tax revenues. This divergence highlights the continued role of excise as a counter-cyclical stabiliser within the indirect tax framework.
Direct Taxes: Structural Resilience Continues
In contrast, direct taxes have remained resilient, both in absolute terms and in their share of total revenue.
According to analysis by SBI Research:
- Direct taxes are budgeted to contribute 59% of total tax revenue in FY 2025-26,
- marking the highest share in the last 15 years, while
- indirect taxes account for the remaining 41%.
Personal Income Tax Outperformance
A notable structural trend is that personal income tax (PIT) collections have consistently grown faster than corporate tax since FY 2020-21. This reflects:
- rising formal employment,
- widening individual tax base, and
- improved compliance through digital reporting.
Corporate tax collections, though improving recently, remain uneven due to profit moderation across select sectors.
Non-Tax Revenue: The Fiscal Shock Absorber
The revenue shortfall has been partially offset by a sharp rise in non-tax receipts, which grew 20.9% during April-November 2025. The principal driver has been higher-than-expected dividend transfers from the Reserve Bank of India.
Disinvestment receipts, however, remained muted at ₹49 billion against a budgeted ₹470 billion, indicating that strategic stake sales are likely to spill over into FY 2026-27.
Expenditure Profile: Capex Takes Priority
On the expenditure side, the Centre has maintained a clear policy stance:
- Revenue expenditure growth remained subdued at 1.8%, while
- Capital expenditure (capex) surged 28.2%, reaching nearly 59% of the annual target within eight months.
CareEdge expects the Centre to:
- meet the FY 2025-26 capex target of ₹11.2 trillion, and
- raise capex further to ₹12.3 trillion in FY 2026-27, maintaining a capex-to-revenue expenditure ratio of around 0.3.
This signals continued reliance on investment-led growth as the anchor of fiscal strategy.
Fiscal Deficit Trajectory: Contained Despite Slippage
Despite the tax shortfall, CareEdge projects:
- FY 2025-26 fiscal deficit at 4.4% of GDP, marginally above Budget estimates, and
- FY 2026-27 fiscal deficit at 4.2-4.3% of GDP, supported by revenue recovery and expenditure discipline.
Gross borrowing for FY 2026-27 is expected in the range of ₹16-17 trillion, broadly consistent with consolidation targets.
FY 2026-27 Outlook: Recovery with Caveats
Looking ahead, CareEdge projects gross tax revenue growth of 9.6% in FY 2026-27, broadly aligned with nominal GDP growth. The recovery is expected to be:
- direct-tax led, and
- tempered by the continued drag from GST rate rationalisation.
In effect, FY 2026-27 is likely to represent a transition year, where revenue buoyancy gradually improves while the fiscal benefits of lower indirect tax rates play out through higher consumption and compliance.
Conclusion
The projected FY 2025-26 tax shortfall does not signal fiscal stress in isolation. Instead, it reflects a deliberate policy choice to prioritise affordability, compliance, and investment over short-term revenue maximisation. The rising dominance of direct taxes in the revenue mix also indicates a maturing tax system, increasingly aligned with income generation rather than consumption alone.
For fiscal policymakers, the challenge in FY 2026-27 will be to translate structural tax reforms into durable revenue buoyancy, without compromising the credibility of consolidation.
Source: CNBC TV18