Union Budget 2026-27: Direct Taxes Surge Past Indirect Collections in 5-Year Revenue Shift
As Union Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2026–27 tomorrow on February 1, comprehensive tax data from the past five years illuminates the evolving revenue landscape of the Indian government. Both direct and indirect taxes have demonstrated steady growth, reflecting significant changes in economic activity, enhanced compliance measures, and strategic policy design. A detailed examination of this data reveals how the delicate balance between taxing incomes and taxing consumption has fundamentally shaped the government's fiscal strategy and priorities.
Direct Taxes: A Remarkable Climb Fueled by Income and Corporate Profits
Direct taxes, which are paid directly by individuals and businesses to the government, primarily encompass income tax, corporate tax, and capital gains tax. Over the past five years, collections from these sources have experienced a sharp and consistent upward trajectory, marking a pivotal shift in revenue composition.
In FY21, direct tax collections amounted to Rs 9.44 lakh crore, a period heavily impacted by the COVID-19 pandemic when both personal incomes and corporate profits faced substantial pressure. The recovery phase commenced in FY22, with collections surging to Rs 14.08 lakh crore as economic activities regained momentum and corporations returned to profitability. This positive momentum continued robustly into FY23, where direct taxes reached Rs 16.59 lakh crore, followed by a further increase to Rs 19.55 lakh crore in FY24.
For FY25, the revised estimate positions direct tax collections at an impressive Rs 22.37 lakh crore, while the Budget 2026 projects this figure to ascend even higher to Rs 25.20 lakh crore. This near three-fold increase from FY21 to the Budget Estimate for FY26 underscores the expanding role of direct taxes in financing government expenditures and public initiatives.
Direct taxes are inherently progressive, meaning individuals with higher incomes contribute a larger proportion, making them a crucial instrument for redistribution and promoting social equity. Additionally, they provide the government with a relatively elastic revenue stream that naturally expands in tandem with economic growth and prosperity.
Indirect Taxes: Steady Revenue Gains Driven by Consumption Patterns
In contrast to direct taxes, indirect taxes are levied on goods and services and are ultimately borne by consumers as part of the final price. These include the Goods and Services Tax (GST), excise duties, and customs duties. Data spanning the same five-year period indicates a consistent, albeit slower, rise in indirect tax collections.
In FY21, indirect tax collections stood at Rs 10.82 lakh crore. Despite the widespread disruptions caused by the pandemic, consumption recovered at a faster-than-anticipated pace, propelling collections to Rs 13.01 lakh crore in FY22. The upward trend persisted with collections reaching Rs 13.95 lakh crore in FY23 and Rs 15.09 lakh crore in FY24.
For FY25, the revised estimate is placed at Rs 16.16 lakh crore, while Budget 2026 anticipates indirect tax collections to rise to Rs 17.50 lakh crore. This growth mirrors rising consumption levels, improved GST compliance mechanisms, and enhanced tax administration efficiency.
However, indirect taxes are generally considered regressive, as they apply uniformly to all consumers irrespective of their income levels. Consequently, lower-income households often allocate a higher percentage of their earnings towards such taxes. This dynamic presents policymakers with the ongoing challenge of balancing revenue generation with concerns regarding affordability, inflation control, and economic equity.
Evolving Tax Mix: Direct Taxes Take the Lead
Analyzing the numbers collectively reveals a prominent trend: direct taxes are expanding at a faster rate compared to indirect taxes. In FY21, indirect taxes were higher than direct taxes. However, by FY24 and FY25, direct taxes had unequivocally overtaken indirect taxes to become the government's largest revenue source.
Thus, this five-year data suggests that India's tax system is progressively becoming more reliant on direct taxes, while indirect taxes continue to grow steadily alongside consumption patterns. For taxpayers, this evolution could signify a continued emphasis on compliance, simplified filing processes, and potential adjustments to tax slabs or rates to maintain revenue buoyancy and fairness.
For consumers, GST and other indirect taxes will remain a critical factor influencing pricing and spending decisions. How the government navigates the balance between revenue requirements and inflation control will be paramount, especially within a global environment characterized by economic uncertainty and fluctuating market conditions.
