The 12 per cent growth in income tax collections so far this fiscal year implies that lower tax rates are leading to a compliance effect | Photo Credit: Prakash Bharti

Direct tax collections, gross and net, for the first quarter of this fiscal have turned in a major surprise. The buoyancy on this count is a big bonus at a time when the Centre is faced with expenditure stress as a result of war induced disruptions. The rise in both personal and corporate tax collections underscores the economy’s resilience to supply shocks and changes in trade policy. Companies seem to have been able to grow their profitability in the first quarter despite the increase in the cost of fuel, logistics and key inputs for several industries as well as agriculture. This indicates pricing power and healthy demand.

Mirroring this counter-intuitive trend, net direct tax collections were up by 16 per cent between April 1 and July 13. The FY27 Budget had assumed a growth of 15 per cent in direct taxes. Direct tax collections took a knock last year, following the cuts in income tax rates announced in the FY26 Budget. The revised estimate for income tax collections in FY26 was 8 per cent lower than the budgeted figure. Therefore, the 12 per cent growth in income tax collections so far this fiscal year implies that lower tax rates are leading to a compliance effect. Higher advance tax payouts for income tax indicate corporate optimism. There was a notable 22 per cent growth in net corporate tax collections (after refunds) and a 16 per cent growth in advance taxes paid by companies.

The Reserve Bank of India’s June Bulletin points to buoyant demand. To take just a few indices, tractor and two-wheeler sales in rural India rose by over 20 per cent and 15 per cent, respectively, in Q1FY27. GST e-way bill generation grew between 10 and 15 per cent in the first three months of this fiscal, implying that the improvement is broad-based. Petrol and diesel consumption has been rising in volume terms despite the increase in pump prices. Higher domestic demand is also evident in non-food bank credit growing 17.8 per cent in June. The volume and value of digital transactions were up 20 per cent and 15 per cent, respectively, in the first quarter.

In addition, ICRA’s business activity monitor index was at a 32-month high in June with 13 of its 16 constituents recording improvement. Automobile sales, including passenger vehicles and two-wheelers, have been robust in the first quarter, with vehicle registrations accelerating 23 per cent in June 2026. Direct taxes have also got a leg-up from securities transaction tax. With trading activity in stock exchanges once again beginning to rise, STT collections have grown at a steep 44 per cent. However, it is too early to extrapolate from these trends for the rest of the year, as several imponderables persist. These include the disruptive effects of an extended war and the prospect of a tepid monsoon. Global trade shocks remain a worry. Yet, initial revenue trends suggest that growth is on track.

Published on July 26, 2026