E-Paper
Consumption and revenue helped by tax policy reforms, says Economic Survey 2025-26
Recent tax policy reforms, including the restructuring of personal income tax and the rationalisation of the Goods and Services Tax (GST) rate, have supported consumption demand while sustaining revenues in absolute terms
Recent tax policy reforms, including the restructuring of personal income tax and the rationalisation of the Goods and Services Tax (GST) rate, have supported consumption demand while sustaining revenues in absolute terms, the Economic Survey said.
The survey explained how the government’s policy of rationalizing direct tax slabs and indirect tax rates, coupled with softer inflation, helped improve the real purchasing power of people, giving a boost to consumption amid adverse impacts on the external economy.
FY26 was an unusually challenging year for the economy on the external front. Heightened uncertainty in global trade and the imposition of high, penal tariffs created stress for manufacturers, particularly exporters, and affected business confidence.
The government responded by using this crisis as an opportunity to push through key measures such as GST rationalisation, faster progress on deregulation, and further simplification of compliance requirements across sectors.
“Looking ahead, the recent rationalisation of GST rates is expected to support demand by lowering tax incidence and improving price competitiveness,” it said. It expects demand to offset the impact of rate rationalization. “Since the lower rates are expected to stimulate higher consumption volumes and strengthen compliance, volume effects could offset the impact of rate reductions on revenues,” it said.
Similarly, rationalsation of direct tax slabs in the Union Budget 2025-26 also helped in demand creation by providing substantial disposable incomes in the hands of taxpayers. It ushered in significant income-tax relief for the middle class, with no personal income tax payable for income up to ₹12 lakh ( ₹12.75 lakh for salaried taxpayers) alongside changes in slabs and rates as well as in tax deducted at source (TDS) rules.
Projecting for the near future after the massive tax rates rationalisation, the survey said FY27 is expected to be a year of adjustment, as firms and households adapt to these changes, with domestic demand and investment gaining strength.
“That said, it must be acknowledged that the external environment remains uncertain, which shapes the overall outlook,” it cautioned about external situations.
The outlook for the global economy remains dim over the medium-term, with downside risks dominating. At the global level, growth is expected to remain modest, leading to broadly stable commodity price trends. Inflation across economies has trended downward, and monetary policies are therefore expected to become more accommodative and supportive of growth, the Survey said.
It pointed at certain key risks. “If the AI boom fails to deliver the anticipated productivity gains, it could trigger a correction in overly optimistic asset valuations, with the potential for broader financial contagion. Additionally, a protraction of trade conflicts would weigh on investment and further weaken the global growth outlook,” it said.
These forces collectively suggest that downside risks to global growth remain prominent, although a fragile stability holds for now, it said. “For India, these global conditions translate into external uncertainties rather than immediate macroeconomic stress,” it added.
