India’s political economy and its fiscal balance are skewed. A small minority (relative to India’s population) of taxpayers contributes the most to tax payments. This money is spent on a lot of heads including welfare programmes of the government. In the past few years, the composition of the direct tax pool has been shifting away from taxes on corporate profits to personal incomes. A large part of this comes from salaried workers in the private and public sector.
The 2025-26
India’s political economy and its fiscal balance are skewed. A small minority (relative to India’s population) of taxpayers contributes the most to tax payments. This money is spent on a lot of heads including welfare programmes of the government. In the past few years, the composition of the direct tax pool has been shifting away from taxes on corporate profits to personal incomes. A large part of this comes from salaried workers in the private and public sector.
The 2025-26 Budget has reciprocated the favour to this taxpayer base by significantly revising income tax (I-T) slabs. This is nothing but a reduction in the real I-T burden. While the political dividends to the government will be immediate, it has taken a calculated risk on the fiscal implications of this decision.
Some economists have pointed out that the assumption of income taxes rising despite foregoing ₹1 lakh crore in revenue may be a tad overambitious. We will know next year whether this risk pays off.
These speculations aside, there is a more substantive question to be asked. Can the Indian economy expect its I-T rally to continue at the same pace? I-T collections have now reached more than 4% of the GDP. This is almost half of the OECD average. An analysis in HT showed that most of the gains came in the post-reform period, which saw a huge expansion in the base of white-collar workers in the private sector. Some of these tailwinds continue to exist. India continues to expand its footprint in sectors such as Global Capacity Centres, creating a new category of well-paid service sector jobs. In manufacturing, schemes such as PLI continue to attract business in high-value sectors such as electronics.
These external tailwinds will, however, need to be supported by domestic drivers to create quality jobs and balance their growth. Most of India’s well-paying jobs, and therefore income tax collections, are concentrated in small geographical pockets -- in a handful of metropolitan cities and their suburbs, which are struggling to meet demands on their infrastructure. Can economic policy help create new I-T generating enclaves in regions outside these existing pockets of opulence? There is a good reason to pursue this as a policy goal. A good way to initiate this conversation will be to release more granular data on I-T collections and then set realistic targets for balanced growth.
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