Experts see Q1 tax dip as ‘Transitional’, expect rebound ahead

A marginal 1.39% dip in India’s net direct tax collections for the first quarter of FY26 has drawn attention, but tax experts believe the slowdown reflects a period of economic transition not a cause for concern. They point to policy changes, evolving corporate behaviour, and a sharp rise in refunds as key reasons for the temporary dip, while forecasting a likely rebound in the coming quarters.
Government data released on Saturday showed that net direct tax collection stood at Rs 4.59 lakh crore as of June 19, 2025, compared to Rs 4.65 lakh crore in the same period last year. The fall comes amid a sharp 58% increase in refunds and muted growth in advance tax payments, traditionally a bellwether of income trends and business sentiment.
“Much of this can be traced to the revised personal income tax regime that came into effect from April 1,” said Samir Kanabar, Tax Partner at EY India. “The lower tax rates have led to reduced TDS outflows, especially from salaried individuals who have shifted to the new tax slabs. This is expected and in line with the government’s intent to leave more disposable income in the hands of consumers.”Advance tax collections grew by just 3.87% to Rs 1.56 lakh crore during the April-June period, a sharp deceleration from the 27% growth recorded last year. Corporate advance tax payments rose 5.86% to Rs 1.22 lakh crore, while collections from non-corporates, including individuals and firms, actually contracted by 2.68%.
But far from signalling a slowdown in economic activity, experts see the numbers as a sign of transformation in India’s tax landscape.This is not a story of weakening fundamentals it's one of evolving strategies,said Sumit Singhania, Partner at Deloitte India. “Corporates are ramping up investments in infrastructure and long-term projects. With higher depreciation claims, profits temporarily look subdued, which in turn impacts tax liability. But this also sets the stage for stronger earnings and tax contributions in the future.
Gross direct tax collections before accounting for refunds stood at Rs 5.45 lakh crore, showing a 4.86% increase over the same period last year. However, the sharp rise in refunds to Rs 86,385 crore effectively dragged down the net figure. Analysts believe the increase in refunds also reflects improvements in tax processing efficiency.
Notably, net corporate tax collections fell over 5% year-on-year to Rs1.73 lakh crore, while personal income tax forming the bulk of non-corporate tax rose modestly by 0.7% to Rs 2.73 lakh crore. Meanwhile, Securities Transaction Tax (STT) collections grew 12% to Rs 13,013 crore, highlighting continued vibrancy in capital markets.For FY26, the Centre has set an ambitious direct tax collection target of Rs 25.20 lakh crore, reflecting a 12.7% growth over the previous year. So far, it has collected 18.21% of this target by mid-June.
Why this matters: 
While the first-quarter numbers may look underwhelming on the surface, experts advise against reading too much into them. The transition to new tax regimes, evolving business investment patterns, and improved refund mechanisms are all contributing to short-term distortions — not systemic weaknesses.
“This dip is a temporary blip rather than a trend,” said Kanabar. “It shows how tax policy and economic cycles interact. The impact of revised slabs and increased corporate capex is visible now, but we expect a more balanced and positive picture by the end of the second quarter.”
Singhania added that India's strong macroeconomic fundamentals and its position in the global supply chain reconfiguration will support sustained tax growth ahead. “As the geopolitical fog clears, we are likely to see stronger corporate earnings, improved tax realisation, and possibly even an overachievement of the fiscal target,” he said.

(Business Correspondent)