The decline in tax collections is primarily attributed to indirect taxes. GST collections experienced a contraction of 2% during April–November FY26, following the rate rationalisation implemented in September, while customs duty collections also saw a drop. Conversely, union excise duties exhibited robust growth, providing some support to overall indirect tax revenues.
In contrast, direct taxes have shown more resilience.
SBI Research pointed out that the contribution of direct taxes to total tax revenue is projected at 59% in FY26, marking the highest share in the past 15 years, while the share of indirect taxes is anticipated to decrease to 41%. Thus, the slowdown in tax collections is mainly concentrated in indirect taxes rather than direct levies.
Additionally, SBI Research highlighted that personal income tax (PIT) collections have been growing at a faster pace than corporate tax collections since FY21, indicating a sustained rise in formal employment and increased individual tax compliance. Although corporate tax growth has improved recently, it remains inconsistent due to profit moderation in some sectors.
The tax shortfall has been partially mitigated by a significant rise in non-tax revenue, which surged by 20.9% during April–November FY26, driven by higher-than-expected dividend transfers from the Reserve Bank of India. However, disinvestment proceeds have lagged at ₹49 billion compared to the budgeted ₹470 billion, with key stake sales expected to carry over into FY27.
On the spending side, revenue expenditure growth has been restrained at 1.8% during the first eight months of FY26, while capital expenditure surged by 28.2%, achieving nearly 59% of the annual target. CareEdge anticipates that the Centre will meet its FY26 capital expenditure target of ₹11.2 trillion and projects capital expenditure to rise further to ₹12.3 trillion in FY27, maintaining a capex-to-revex ratio of around 0.3.
CareEdge estimates the fiscal deficit for FY26 to remain controlled at 4.4% of GDP, slightly above the budgeted level, supported by strong non-tax receipts and cautious revenue expenditure. For FY27, the fiscal deficit is projected to be in the range of 4.2–4.3% of GDP, with gross borrowing expected to fall between ₹16–17 trillion.
Looking forward, CareEdge forecasts gross tax revenue growth of 9.6% in FY27, aligning broadly with nominal GDP growth, bolstered by a rebound in direct tax collections, despite the ongoing impact of GST rate rationalisation on indirect taxes. The report indicates that the fiscal outlook for FY27 remains balanced, with investment-led spending and improving revenue trends anticipated to reinforce consolidation efforts.
