Is the Government Killing its Golden Goose of Income Tax?

It would be reasonable for the government to expect a shortfall in income tax receipts in 2025-26, probably in the range of Rs 1.25-2.25 trillion.

(Photo: Vibhushita Singh/The Quint)

The Controller General of Accounts (CGA) recently released the Government of India’s provisional tax receipts data for 2024-25. Personal income tax (PIT) receipts stood at Rs 12.35 trillion, falling short of the revised estimates (RE) of Rs 12.57 trillion; much against the expectations by Rs. 21,830 crore (nearly 1.75 percent).

The PIT receipts are primarily income tax receipts from individuals and non-corporate assesses, but also includes securities transaction tax (STT) and other small tax receipts. In 2024-25, the income tax receipts totalled Rs 11.83 trillion, STT Rs 0.52 trillion, and other receipts Rs 9 crore. 

The income tax receipts growth dropped sharply to 17.02 percent in 2024-25, compared to 25.08 percent in 2023-24. While the income tax receipts grew at 50 percent in the first quarter, such receipts recorded growth of only 6.61 percent, 16.81 percent and 6.08 percent in Q2, Q3, and Q4 respectively. The fourth quarter growth of 6.08 percent was particularly concerning.

So, what is going on with income tax receipts? Are they getting stalled? How will the giveaway of Rs 1 trillion in Budget 2025-26 impact income tax receipts? Will it lead to negative growth in 2025-26? 

Overall Underperformance in 2024–25

Almost all tax categories underperformed in 2024-25, as per the provisional estimates.

Gross tax receipts (GTRs) of Rs 37.95 trillion turned out to be 98.5 percent of the RE of Rs 38.53 trillion. Only one tax— the corporation tax—delivered slightly higher receipts, with receipts of Rs 9.87 trillion, compared to the previous year’s RE of Rs 9.80 trillion. But even in this case, provisional receipts are lower than 2024-25 BE of Rs 10.20 trillion. 

GST receipts—including central GST, integrated GST, and GST compensation cess—totalled at Rs 10.26 trillion, falling short of Rs 35,408 crore (3.33 percent) against 2024-25 RE of Rs 10.62 trillion. Excise duty receipts at Rs 3.05 trillion were not only lower than the 2024-25 RE of Rs 3.10 trillion, but also 2023-24 receipts of Rs 3.09 trillion. Customs duties were also marginally lower at Rs 2.33 trillion than 2024-25 RE of Rs 2.35 trillion.   

Net tax receipts of the Government of India (GTR minus transfer to states) at Rs 30.78 trillion were only 97.8 percent of 2024-25 RE of Rs 31.47 trillion. Non-tax receipts (Rs. 5.38 trillion) bettered 2024-25 RE of Rs 5.31 trillion (101.2 percent). However, capital receipts (from recovery of loans and disinvestment) at Rs 0.42 trillion were only 70.9 percent of 2024-25RE.  

Total tax, non-tax, and capital receipts at 97.8 percent of 2024-25 RE were distinctly quite weaker than 101.2 percent of the 2023-24 RE.  

A more than 2 percent shortfall in all non-debt receipts taken together should be a big cause of worry. 

Income Tax Receipts: A Bigger Red Flag

Decline in overall tax receipts in 2024-25, barring GST receipts, is worrying, but not alarming.

There is, however, a serious cause for deeper anxiety in case of personal income tax (PIT), the best war-horse for holding up the Government of India’s fiscal performance in the last three years. 

The government had projected PIT receipts at Rs 12.57 trillion for 2024–25. Excluding STT of Rs 0.55 trillion and other receipts of Rs 0.03 trillion, the personal income tax receipts were estimated at Rs 11.99 trillion. As per the provisional estimates, the income tax receipts came in at just Rs 11.83 trillion. This is Rs 16,336 crore (1.36 percent) shorter than RE. The STT receipts, at Rs. 0.52 trillion, are also less than the RE.  

The income tax receipts (other than STT) had increased phenomenally in the last four years. In terms of provisional CGA numbers (for the sake of consistency), the income tax receipts went up from Rs 6.73 trillion in 2021-22 to Rs 8.08 trillion in 2022-23 (annual growth of 20.02 percent).

In 2023-24, these receipts at Rs 10.11 trillion increased by as much as 25.08 percent. In 2024-25, however, the annual income tax growth came down to 17.02 percent only.  

This is distinct evidence of income tax receipts growth tiring in 2024-25. 

A bigger cause of concern, with respect to income tax receipts, was hidden in the quarterly receipts performance data. In Q1 2024–25, income tax receipts surged massively by nearly 50 percent (from  Rs 1.92 trillion to Rs 2.87 trillion). But Q2 growth dropped sharply to 6.65 percent and Q3 growth recovered slightly to 16.81 percent.

The worst performance was reserved for the fourth quarter, historically the best quarter for the income tax receipts. It recorded growth of only 6.08 percent (from Rs 3.23 trillion in 2023-24 to Rs 3.45 trillion in 2024-25 Q4).  

Single-digit growth in two quarters of 2024-25, with a pedestrian growth in the last quarter, is enough to sound alarm bells. 

Trouble Ahead

The declining trend in income tax receipts growth is likely to become hugely problematic in the context of the generous tax breaks announced in the latest budget. 

To please Delhi voters, Finance Minister Nirmala Sitharaman had raised the income threshold for zero tax liability under the new regime from Rs 7 lakh to Rs 12 lakh.

She had also sweetened income tax slabs in the new assessment scheme introduced in 2022-23. The maximum rate of 30 percent was shifted from Rs 15 lakhs to Rs 24 lakhs.  Now, income up to Rs 4 lakh is exempt; Rs 4–8 lakh is taxed at 5 percent; Rs 8–12 lakh at 10 percent; and income up to Rs 24 lakh attracts lower tax rates overall. 

The Finance Minister had claimed credit for providing tax savings ranging from Rs 70,000 to Rs 1.1 lakh to the middle-class taxpayers to shift their voting preferences to her party. She had claimed that more than one crore (out of total about 3 crore taxpayers which actually pay income tax) would exit the income tax net, as a consequence of her tax-largesse of more than Rs 1 lakh crore.  

Curiously, despite sure signals of thaw in income tax receipts and the largesse she granted, she increased the estimated personal income tax receipts (including STT) to Rs 14.38 trillion for 2025-26.  

Dark Clouds 

With provisional PIT receipts for 2024-25 of Rs 12.35 trillion –short of target by about Rs 0.22 trillion—the asking rate for 2025-26 BE over 2024-25 RE is very high at 16.42 percent  

It would be next to impossible for the government to get this kind of increase in PIT receipts in 2025-26, with minimum effective tax slab rising to Rs 12 lakh and the taxpayers expecting the promised bonanza of Rs. 1 trillion. 

It would be reasonable for the government to expect a shortfall in income tax receipts in 2025-26, probably in the range of Rs 1.25-2.25 trillion.  

The evidence has started showing up. As of 19 June, the personal tax receipts, now called non-corporate tax receipts, are only 0.7 percent higher than the receipts in the same period last year. Final collection in 2025-26 may be in the range of Rs 12.00 trillion to Rs 13.25 trillion, likely towards the lower end of the range.

Despite the higher RBI dividend this year, it might be prudent for the Government of India to tighten its fiscal belt. 

(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)