India’s On Course To Hit Annual Targets Even With A Dip In Net Tax Collections

The financial year of 2025-26, which began with uncertainties like tariff tantrums and slowdown in core sector growth, also saw its net direct tax collections fall by 1.34% in its first quarter. Experts attribute this fall to several reasons, including a sharp Rs 1.01 trillion in refunds, a rise in advance tax payments, and more. Other factors like the massive tax relief on income tax cause a fall in net tax collections, but few see any macroeconomic pain indicators in these numbers.

While net direct tax collections have come down, gross collections have gone up by 3.7%. Refunds have gone up by 38% YoY. Direct tax constitutes income tax, corporate tax, and securities transactions tax.

The higher refunds seen in Q1 may partly reflect a seasonal trend as May-June sees a higher refund outflow. Some experts attribute it to faster and smoother processing of refunds by the tax department.

“Robust tech use and stronger governance have resulted in an increase in the tax returns being filed as compared to the previous years. The overall processing time for the IT department has also reduced considerably, clearly showing the adaptation of tech-enabled services at the tax authorities’ end," said Deepashree Shetty, partner, global employer services, and tax & regulatory services at BDO India.

Advance Tax & TCS Effect

A lion’s share (80%)of the total refunds went into the corporate sector, likely because companies made higher tax payments.

“Excess payment of advance tax is a common reason for refunds,” said Dr Suresh Surana, a chartered accountant and added, “Corporates often adopt a conservative approach while estimating their tax liability, resulting in a higher upfront tax payment to safeguard against potential underestimation,”

Advance tax, also known as ‘pay as you earn’ tax, is paid in instalments throughout the financial year, to avoid a lump-sum payout. In the case of corporates, where the tax outflow is large, paying taxes in advance helps mitigate the risk of interest charges under Sections 234B and 234C of the Income-tax Act, 1961 or The IT Act. As the final tax liability is computed during return filing, excess amounts are refunded.

Rajashree Sarna, partner at Grant Thornton Bharat, noted that the higher refunds are also linked to an increase in self-assessment and advance tax payments by individuals.

“In the last 10 years, from 45% self-assessment or advanced taxes being paid, the number has drastically gone up to almost 60% now. People are more aware, paying advance taxes and self-assessment tax more in time and during the FY or during returns filing. It is possible that there is an overestimation of income and higher amount of taxes being paid, which translates to refund,” she said.

Regime Resets Returns

While gross collections from corporate and securities transaction tax (STT) increased, non-corporate taxes (NCT) that include income tax have gone down by 1.2%. This could be an impact of regime change wherein the Government of India said in the latest Union Budget that there will be no tax on income up to Rs 12 lakhs per annum, under the New Tax Regime.

"TDS (tax deducted at source) is being collected in accordance with the new fiscal year tax legislation, which increased the basic exemption limit for everyone from Rs 3 lakh to Rs 4 lakh. This will have a direct impact on the salaried class, causing TDS to be lower than last year this time. An increasing number of people are opting for the New Tax Regime, which decreases the tax burden even further by eliminating deductions. This would further cut quarterly tax payments to the ITD,” said Suneel Dasari, founder and CEO of EZTax.in.

The fall in tax liability, driven by enhanced rebates and revised tax slabs, has led to moderation in tax collections. Most tax experts believe that reducing the tax burden on the middle-class will have little impact on overall revenue, as this group constitutes a relatively small part of the government’s tax collections.

Yet, a cause of concern in Q1 is a sharp fall of 81% seen in the ‘other taxes’ category — from Rs 1,422 crore in FY25 to Rs 273 in FY26. The Income Tax Department has not specifically defined the components classified under ‘Other Taxes’ nor has it provided a detailed breakup of the same in its public disclosures.

“This category is generally understood to include certain ancillary levies such as the equalisation levy, interest and/or penalties collected under various provisions of the Income Tax Act, and other minor miscellaneous tax receipts. The fluctuation in collections under this head may be attributed to timing differences, changes in enforcement activity, or the nature of digital economy transactions subject to such levies,” said Surana.

Stock Markets & Tax Revenues

Despite the changes, adjustments and many oscillations, few experts doubt that the government will reach the tax collection target it has set this year. The central government has estimated direct tax collections at an ambitious Rs 25.2 trillion for FY26. This was after FY25 collection grew 13.5% in Rs 22.26 trillion, exceeding expectations.

According to Sarna, there have been changes to reporting of transactions. Like the reporting of statements of financial transactions (SFT) gone up from 2014 onwards. The government has been trying to reduce tax evasion by increasing the scope of SFT reporting, which helps them monitor high-value transactions very closely.

As per the improved standards, banks, post offices, registrar's offices, and other financial institutions are expected to report transactions beyond a threshold. It helps the department monitor a wide range of activities, including large scale bond or mutual fund investments, cash withdrawals or deposits, real estate purchases, credit card spends, forex transactions and more.

They are reporting the data, which flows into the 26 AS, AIS and PIS, which taxpayers can see. If we put everything together, the reporting framework and the economy and the corporate results and the trends, looks like the tax collections or the tax revenue forecast will be pretty much, it will get achieved, we will be on track,” she adds.

Moreover, a windfall is expected to come in from three areas — STT or securities transactions tax, which has already recorded a healthy growth in the said period, due to increased participation in equities.

As financialisation of savings picks up, the government can also expect higher revenue from capital gains tax. Individual tax payouts are also expected to go up, especially from stock options, which might soon reach maturity – either from the startup ecosystem or large corporates.

The government has taken up measures to increase tax collection at source, adding to the direct tax kitty. "Several measures such as increase in the taxpayers’ base, withholding tax provisions, advance tax payments and TCS remittances have resulted in increased tax collections at source for the tax authorities,” says Shetty.

As a new tax regime is coming into effect, net tax collections are merely going through an adjustment phase. “Net collections tend to stabilise over the course of the fiscal year as advance tax payments, TDS, and self-assessment tax collections progressively rise,” adds Surana.