Modi Govt’s Tax Concessions, GST Cuts Are Pushing Revenues Into Crisis: Ex-Finance Secy S.C. Garg

New Delhi: The Union government’s tax receipts have been falling since the last financial year and several signs of stress have set the stage for a weak 2025-26, according to former finance secretary Subhash Chandra Garg. 

In an analysis for The Tribune, Garg writes that the government did not achieve the revised estimates (RE) projections for 2024-25 with more bad news in the first quarter of 2025-26 as the finance ministry reported that net income tax collections declined by 3.9% till August 11, 2025.

Noting Prime Minister Narendra Modi’s fiscal bombshell on August 15 – the introduction of “next-generation GST reforms” by this Diwali – and the new bill banning online real money gaming will have serious implications for both direct and indirect taxes, he says that the government “has embarked on a spree of tax-receipt destruction”.

The Controller-General of Accounts (CGA)’s recent report on Union government’s accounts noted a significant underperformance in gross tax receipts (GTRs) for 2024-25 against the revised estimates (RE), as presented to Parliament on February 1, just two months before the close of the financial year.

The total non-debt receipts (i.e. government income excluding borrowings) were recorded at Rs 30.78 trillion, which is 97.8% of what was projected in the RE. While this may appear like a small gap, it is significant.

There were shortfalls across the board: GST receipts (CGST + IGST + compensation cess) recorded a shortfall in excess of Rs 35,000 crore; excise duty collections were lower than both, the RE and even the previous year’s collection (2023–24); customs duty collections were slightly short; and personal income tax (PIT), which had been strong since 2021-22, was also now showing signs of stress and was lower than RE.

“Such a significant shortfall in GIRs and under performance in taxes is foreboding. It sets the stage for a weak 2025-26,” Garg writes.

Worrying performance in first quarter of FY26

In the first quarter of 2025-26, while indirect tax performance was erratic, direct tax performance was outright bad. While the GST receipts were a nominal 10% higher than that in the same quarter previous year, Garg argues that this was so on account of a sleight of hand. 

“The Central Government did not distribute Integrated GST (AGST) receipts of Rs 27,312 crore to the states and kept it for itself. This hid the lacklustre performance in the Central Government's principal GST receipts - both the Central GST (CGST) and compensation cess receipts were merely 1.5% higher than those in the first quarter of 2024-25,” the former finance secretary says.

While excise duties recorded a growth of 8.27%, custom duties were down by 9.88%. “Excluding the artificial ramp-up effect of the IGSTs non-distribution, the indirect taxes (CGST, compensation cess, customs and excise) receipts at Rs 3.68 trillion in the first quarter of 2025-26 were barely 1% higher than those in 2024-25 first quarter,” he adds.

In terms of direct taxes, corporation tax receipts were 12% lower than the previous year, while PIT went negative with receipts of Rs 286 trillion – 0.52% lower than the same quarter in 2024-25.

At a time when India was witnessing a slowing economy, the largesse of income tax giveaways in the 2025-26 Budget (no tax up to Rs 12 lakh income and lower tax slab rates for incomes up to Rs 25 lakh) have started showing repercussion signs.

On August 12, when the Central Board of Direct Taxes (CBIT) released the direct tax collection numbers stating that gross direct tax collections had contracted by nearly 2%, whereas net direct tax receipts – gross minus refunds, which is the actual government income – was at Rs 6.4 trillion, lower by 3.9% compared to the net receipts in the same period last year. 

According to Garg, this was unprecedented and deeply disquieting.

The PIT, now called non-corporate tax (NCT), recorded a shortfall at Rs 4.43 trillion, Rs 0.40 trillion less than the Rs 4.83 trillion receipts of the same period in 2024-25. “There could not have been a more serious proof of the negative effects of the tax largesse granted in 2025-26 Budget,” he says. “While the government had budgeted for a 14% tax growth in the NCT (over the 2024-25 RE), the fact that receipts had fallen into negative territory suggested loud and clear that the effect of tax concessions would be far greater than the Rs 1-trillion loss estimated by Finance Minister Nirmala Sitharaman in her Budget speech.”

August announcements

As if the signs were not clear enough on the stasis in tax receipts, the Union government appears to have decided to go all in, sacrificing more fiscal revenues with two new measures taken in the second fortnight of August.

The first: Prime Minister Modi announced from the ramparts of Red Fort on August 15 that the government would give “a gift on Diwali” by granting relief in GST. 

The next day, the finance ministry released its proposals to the GST Council to merge the 12% GST slab with the 5% one, and transfer a number of goods from the 28% GST slab to the 18% one. This was quickly followed by endorsements by the ministers.

According to the report, the GST Council is expected to formally approve the proposals in its September 3-4 meeting. With several of government’s ordinances being issued rapidly, this ‘Diwali gift’ will also come into force soon, Garg says, adding that the GST announcement is likely to come into effect much before Diwali and the Bihar elections.

However, this is not without its consequences. “The PM’s premature announcement has led to a loss of GST revenue as people are postponing the purchase of these prod-ucts. The GST giveaways are likely to hit the GST receipts by about 1-1.5% – a loss of more than Rs 2 lakh crore,” the former secretary notes.

In addition, the government’s bill to ban online real money gaming will also stop all GST and direct tax revenue from gaming. 

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