Union Budget 2026 | Narendra Modi govt is staring at a Rs 3-trillion hole

The Government of India is facing severe headwinds on the tax revenue front as it prepares the Union Budget 2026-2027.

For 2025-2026, the government budgeted gross tax receipts (GTRs) — the total receipts from all Central taxes — at Rs 42.7 trillion, estimating a growth of 11.1% over the 2024-2025 revised estimates (RE) of Rs 38.53 trillion.

Until November 2025, for which official data is available, the government received the GTRs of Rs 23.36 trillion, which is 55% lower than the budgeted estimates (BEs). This is only 3.34% higher than the GTRs of Rs 22.61 trillion received in 2024-2025.

Given this, there is no way the government can reach anywhere close to the 2025-2026 GTR BEs.

What tax loss is the government facing for 2025-2026? How will it cope with this impending shortfall? What is the outlook for 2026-2027?

Tax giveaway bets failed

The government made two big tax giveaways in 2025.

Union Finance Minister Nirmala Sitharaman, in her 2025-2026 Budget speech, primarily to woo middle-class voters before the Delhi elections, made two big income tax concessions. Income tax on incomes up to Rs 12 lakh a year was effectively abolished, and tax rates for income slabs up to Rs 30 lakh were significantly reduced.

On her own admission, these tax concessions were to cost Rs 1 trillion in income tax losses. She justified the giveaway to empower the middle-class to boost consumption. Despite this fiscal concession of almost 8% of income-tax receipts, she naively believed that income tax receipts would grow by over 14% in 2025-2026 over the RE of Rs 12.57 trillion.

Instead, income tax growth tanked. Till November, income-tax receipts, at Rs 7.48 trillion, grew by only 6.78%.

The second tax giveaway came out of the blue before the Bihar polls.

Prime Minister Narendra Modi, on August 15, in his Independence Day speech, announced a ‘double Diwali GST bonanza’.

Following his announcement, the GST Council delivered a massive reduction in GST rates for hundreds of goods. The GST slab of 12% was abandoned, and goods subject to that were either exempted from GST or taken to the 5% slab. For many products of middle-class aspirations — cars, televisions, etc. — the tax went down from 28% to 18%.

The officialdom tried to play down its impact on GST receipts. Reality, however, has been harsher, with the GST receipts recording a significant loss in momentum. The gross GST collections (including compensation cess) at Rs 5.46 trillion, increased by only 0.52% in the October-December quarter, despite the GST rate-cut bonanza. In December, the net GST receipts (after refund), at Rs 1.5 trillion, were 2.78% lower than in December 2024.

The NSO’s 2025-2026 advance GDP estimates, released on January 7, put consumption growth at only 7%, slower than the 7.2% seen in 2024-2025.

Clearly, both the big tax cuts failed to boost consumption while jolting government tax revenues.

A Rs 3-trillion shortfall

The situation is likely to become worse in the last quarter of 2025-2026 (January to March). The government is staring at a substantial reduction in estimated receipts of both income taxes and Central GST receipts for 2025-2026.

Taking the income-tax collections in eight months (April to November) and the current trends, it will be imprudent to factor in a growth of more than 6% over the 2024-2025 provisional receipts of Rs 11.82 trillion. This leads to a 2025-2026 RE income tax of Rs 12.52 trillion, resulting in a loss of about Rs 1.85 trillion.

The net GST (Rs 15.13 trillion) growth, after refunds, is only 4.7% at the end of December. The Central GST receipts for 2025-2026 are, therefore, unlikely to exceed 5% over provisional receipts of Rs 10.26 trillion in 2024-2025. This gives GST receipts of Rs 10.77 trillion, which is another loss of about Rs 1 trillion.

The two big tax giveaways will cause a loss of Rs 2.75 trillion to Rs 3 trillion for the government.

Separately, analysts are pegging the profitability growth of the NSE50 companies (the top 50 companies listed at the NSE) between 2% and 4% for the December quarter, which is the lowest in the last six quarters. As corporate taxes have grown at about 7.8% in the first eight months and lower profit growth lies ahead, it will be safer to pencil in a growth of 7% over provisional receipts of Rs 9.87 trillion in 2024-2025, resulting in lesser receipts of Rs 25,000 crore.

In the first eight months of FY2026, excise duties recorded growth of 9.25% and customs duty contracted by 7.32%. For 2025-26 RE20, shortfall/excess in these taxes can be ignored.

Overall, the government is staring at a shortfall of about Rs 3 trillion in gross tax collections in 2025-2026.

No reasons for optimism

There are no major reasons or drivers to factor in any major optimism in tax growth for FY2027. The government is planning an overhaul of customs duties, which is unlikely to raise customs duty revenues. On the contrary, the adverse effects of GST rate cuts will continue to show up in 2026-2027.

Learning from the experience, the government is unlikely to embark on another misadventure by further cutting corporate and personal income taxes, or GST rates.

It will be prudent to assume a GTR growth of ~7-8% for 2026-2027. As the 2025-2026 GTRs are expected to be Rs 39.7 trillion (i.e. Rs 42.7 trillion minus Rs 3 trillion), building-in 8% growth, the government might be well advised to keep the 2026-2027 GTR estimates at Rs 42.9 trillion.

Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream Dented’, ‘Commentary on Budget 2025-2026’, and ‘We Also Make Policy’.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)