When presenting the Union budget last February, the government projected a 13% growth in direct tax collections for the current financial year, banking on the strong tax buoyancy seen in preceding years.
However, between April and mid-December of this year, collections have grown approximately 8%. The income tax department is confident of meeting the target for the year. But the moderation in the growth rate is impacting tax administration.
The department is now nudging taxpayers to be more honest about the deductions they claim and make accurate reporting. Undisclosed foreign income is also in focus. Mint examines how the tax administration is tightening compliance following the reduction in tax rates this fiscal year.
What is the direct tax collection trend so far?
After the 43% post-pandemic rebound in personal income tax collection in FY22, revenues from individuals’ incomes continued to grow strongly—by 20%, over 25%, and over 20% in the following three years.
Hence, when the government offered an income rebate in the budget for this fiscal year for up to ?12 lakh (up to ?12.75 lakh in the case of salaried individuals), it forecast a 14.4% growth in personal income tax collection. It also assumed a 10.4% annual growth in tax receipts from corporations.
However, up to mid-December, non-corporate tax collection, mainly personal income tax receipts, grew only 6.4%, while corporate tax receipts increased 10.5%. Overall, direct tax receipts grew 8% this fiscal year up to mid-December, against the 13% growth estimated.
While the gap could be narrowed closer to the end of the financial year, the moderating growth warranted administrative intervention.
How is the tax department responding?
Historically, deductions claimed by individuals in their tax returns were not a primary focus of compliance enforcement by the income tax department, except in select scrutiny cases.
However, with personal income tax rates having been progressively reduced, widening and protecting the tax base has gained greater importance, making accurate reporting of both incomes and deductions a key compliance priority for the department.
The IT department is currently running a campaign to encourage voluntary compliance with emails and text messages to identified taxpayers, encouraging them to update or revise tax returns.
Central Board of Direct Taxes said last month that 3.6 million individuals have either updated or revised their tax returns in FY26 in response to the drive. The campaign, called the ‘non-intrusive usage of data to guide and enable (Nudge)’ also urges taxpayers to come clean on bogus donations to unrecognized political parties.
The IT department also wants individuals who have not reported their foreign income or assets to get those included in their tax returns.
Experts said the tax department is enhancing compliance and monitoring efforts to stay aligned with the ?25.2 trillion direct tax collection target for the current year. “A key focus has been on leveraging data analytics to identify reporting gaps and encourage timely corrections," said Amit Maheshwari, managing partner at AKM Global, a tax consulting firm.
“The recently launched Nudge campaign reflects this shift; taxpayers are being prompted through soft alerts to voluntarily reconcile mismatches and improve disclosures, rather than facing immediate scrutiny through formal notice," Maheshwari said, adding that closer tracking of advance tax inflows is also supporting the revenue collection trajectory.
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