Government Faces Hurdle in Meeting FY27 Direct Tax Collection Target

Government Reassesses FY27 Direct Tax Target Amid Slow Growth

The government is reassessing its FY27 direct tax target of Rs 26.97 lakh crore after direct tax collections grew only 5 percent in the previous fiscal year, well below the revised budget estimate of 11 percent. Officials told Moneycontrol that the slower nominal GDP growth has added to the challenge in achieving the target.

According to data released on May 4, the actual direct tax collection for FY26 was Rs 23.39 lakh crore, which is Rs 70,000 crore short of the revised estimate of Rs 24.21 lakh crore. The shortfall was led by a decline in income tax collections, with corporate tax collections lower by about Rs 10,000 crore.

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The government had assumed nominal GDP growth of 10 percent in the current year for its estimates, pegging direct tax collections growth at 11.4 percent, targeting a buoyancy of 1.1. However, due to a decline in actual collections, the growth in direct tax collections for FY27 is now projected at 15.3 percent over FY26, with expected buoyancy now at 1.5.

Government officials said that policy decisions have also influenced the Central government's revenue outlook. The government's move to exempt income up to Rs 12 lakh under the new tax regime has had a fiscal cost. "Personal income tax growth slowed to about 2.7 percent in FY26, and the impact is continuing into the current fiscal," one official said.

Experts attribute the slowdown in direct tax collections to lower nominal GDP growth, which typically reflects slower growth in corporate revenues at current prices, weighing on profits and reducing corporate tax collections. Sandeepp Jhunjhunwala, Partner at Nangia Global Advisors, noted that companies are currently facing cost pressures that squeeze margins, while AI-automation-led slower hiring and lower wage growth have led to moderation in the growth trajectory of personal income tax collections.

Riaz Thingna, Partner at Grant Thornton Bharat, observed that the growth in FY 2026 in direct tax collections is despite reduced tax rates and global headwinds, including supply chain disruptions. "The FY26 data suggests a balanced tax composition with both corporate and individual taxpayers contributing significantly to the exchequer, and the increase in corporate tax collections points to relatively stable profitability across sectors," Thingna said.

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The emerging gap between tax targets and actual collections will make fiscal management difficult if collections do not improve in the second half. The challenge to adhere to the capex target and meet the fiscal deficit aim of 4.3 percent of GDP for FY27 is compounded by structural pressures. Interest payments account for about 26 percent of total expenditure and nearly 40 percent of revenue receipts, limiting fiscal flexibility if revenue growth remains weak.

Abhishek Upadhyay, a senior economist at ICICI Securities Primary Dealership, noted that a 10 basis point increase in fiscal deficit (4.6 percent) from 4.5 percent is very likely, given the pressures the Centre is facing on the fiscal front. Higher-than-budgeted spending could lead to fiscal slippage, with the government expecting the fiscal deficit to rise to 4.5-4.6 percent of GDP in FY27.