Tax concessions are bleeding the exchequer

THE Central Government's tax receipts scenario has been turning increasingly bleak since the last financial year. The government did not achieve the revised estimates (RE) projections for 2024-25. Further bad news came in the first quarter of 2025-26. The Finance Ministry reported that the net income tax collections declined by 3.9% till August 11, 2025.Recent actions suggest that the government has embarked on a spree of tax-receipt destruction. The Prime Minister dropped a fiscal bombshell on August 15 with the announcement of a double GST Diwali gift. In the monsoon session of Parliament, the government banned online real money gaming. It will have serious implications for both direct and indirect taxes. What is going on?The first worrying signal appeared when the Controller-General of Accounts (CGA) — who keeps and publishes the Central Government's accounts and monthly financial data — reported a significant underperformance in gross tax receipts (GTRs) for 2024-25 against the revised estimates, as presented to Parliament on February 1 — barely two months before the close of the financial year.The provisional data for 2024-25 reveals that the Central Government's non-debt receipts (all receipts except borrowings) at Rs 30.78 trillion were 97.8% of the RE. Tax under-performance was quite widespread — GST receipts (central GST, integrated GST and GST compensation cess) had a shortfall in excess of Rs 35,000 crore; excise duties were lower than not only the RE but also the 2023-24 receipts; customs duties were lower, though marginally; and personal income taxes (PITs), which had been the star of fiscal performance since 2021-22, were showing signs of stress and were lower than the RE. Such a significant shortfall in GTRs and under-performance in taxes is foreboding.It sets the stage for a weak 2025-26. Its first quarter brought more bad news, turning the clouds of fiscal under-performance darker. Indirect tax performance was quite erratic. Direct tax performance was outright bad. While the GST receipts were nominally (about 16%) higher than those in the same quarter of 2024-25, it was so on account of a sleight of hand. The Central Government did not distribute Integrated GST (IGST) receipts of Rs 27,312 crore to the states and kept it for itself. This hid the lacklustre performance in the Central Government's principal GST receipts — both the Central GST (CGST) and compensation cess receipts were merely 1.5% higher than those in the first quarter of 2024-25. Excise duties recorded a growth of 8.27%, but customs duties were down by 9.88%. Excluding the artificial ramp-up effect of the IGST's non-distribution, the indirect taxes (CGST, compensation cess, customs and excise) receipts at Rs 3.68 trillion in the first quarter of 2025-26 were barely 1% higher than those in 2024-25 first quarter.Red lines were clearly visible in the case of direct taxes. Corporation tax receipts were 1.2% lower than the previous year. In a sign of impending disaster, the PIT actually went into the negative territory, with receipts of Rs 2.86 trillion — 0.52% lower than those of 2024-25 first quarter. For June 2025, PIT growth fell by as much as 12%. India's slowing economy and the consequences of the largesse of income tax giveaways in the 2025-26 Budget had begun to show.The worst fears about the deteriorating tax performance were confirmed when the Central Board of Direct Taxes (CBDT) released the direct tax collection numbers on August 12. Gross direct tax collections contracted by nearly 2% whereas net direct tax receipts (gross minus refunds, which is the actual government income) at Rs 6.4 trillion were lower by as much as 3.9% compared to the net receipts in the same period of 2024-25. This was quite unprecedented and deeply disquieting. Shortfall in PIT, now called non-corporate tax (NCT), was quite conspicuous. The NCT receipts at Rs 4.43 trillion were Rs 0.40 trillion less than the Rs 4.83-trillion receipts of the same period in 2024-25. There could not have been a more serious proof of the negative effects of the tax largesse granted in 2025-26 Budget (no tax up to Rs 12 lakh income and lower tax slab rates for incomes up to Rs 25 lakh). While the government had budgeted for a 14% tax growth in the NCT (over the 2024-25 RE), the fact that receipts had fallen into negative territory suggested loud and clear that the effect of tax concessions would be far greater than the Rs 1-trillion loss estimated by Finance Minister Nirmala Sitharaman in her Budget speech.Despite repeated confirmations of stasis in tax receipts, the government seems bent upon going on the dangerous path of sacrificing more fiscal revenues at the altar of politics. Two additional measures taken in second fortnight of August confirm this.The Prime Minister announced, from the ramparts of Red Fort on August 15, that the government would give a double Diwali gift by granting big relief in GST. The announcement was followed up with top speed. The next day, the Finance Ministry released its proposals to the GST Council — of merging the 12% GST slab into 5% one and transferring most of the goods in the 28% tax slab to the 18% slab, including cars and ACs.A few days later, the Group of Ministers (GoM) constituted by the GST Council met the Finance Minister and hurriedly endorsed the proposal. The GST Council will formally approve the proposals in its September 3-4 meeting. The tax gift bonanza will come into force soon, with governments rapidly issuing ordinances. The Prime Minister's announcement is likely to become the law of the land much before Diwali and the Bihar elections.The current GST effective rate is about 11.5% of the GST tax base (against 15.5% proposed by the experts' committee in 2016, before the GST came into force). The PM's premature announcement has led to a loss of GST revenue as people are postponing the purchase of these products. The GST giveaways are likely to hit the GST receipts by about 1-1.5% — a loss of more than Rs 2 lakh crore.The government hurriedly brought in a Bill to ban online real money gaming (which is what earns all GST and direct tax revenue from gaming). Real money games have either stopped or will go underground or abroad. The government's tax revenue will surely get lost.At the moment, it seems that both direct and indirect taxes will record hardly any growth in 2025-26 as frittering away tax revenues has become politicians' new weapon to win elections.Subhash Chandra Garg is former Finance Secretary to Govt of India.

Tax concessions are bleeding the exchequer

Subhash Chandra Garg

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