Despite a recent slowdown in direct tax collections, the Central Board of Direct Taxes (CBDT) is optimistic about meeting its Financial Year 2025-26 target, thanks to India’s economic growth and advanced digital compliance initiatives.
Direct Tax Collections on Track
The net direct tax collections saw a slight dip, down 1.3 percent year-on-year until July 10. CBDT Chairman Ravi Agrawal attributes this primarily to higher refunds and a shift in tax filing due dates.
However, the department remains confident. Agrawal believes that as the economy grows, tax collections will naturally increase. Combined with improved tax administration, the FY26 target is well within reach.
Digital Drive Boosts Compliance
The Income Tax Department is leveraging digital technology to enhance compliance. Annually, it captures data from around 650 crore transactions, using this to generate Annual Information Statements (AIS) for over 40 crore PANs.
These online statements provide taxpayers with a comprehensive view of their financial activities, including TDS, tax payments, and other transactions. In FY 2024-25, over 7.4 crore taxpayers viewed their AIS, averaging 3.5 visits each, indicating high engagement and trust in the data provided.
AI: The New Tax Enforcer
Artificial Intelligence plays a crucial role in identifying potential compliance gaps. AI helps pinpoint individuals who ought to file returns but haven’t, and flags inconsistencies in returns that have been filed. It also identifies patterns of repeated mistakes for “harder nudges.”
This AI-powered analysis allows the department to handle the immense volume of data from 9 crore filers and 40 crore AIS-updated individuals, ensuring targeted and efficient tax administration across a diverse taxpayer base.
Successful “Nudge” Campaigns
The department’s ‘Project INSIGHT’ creates a 360-degree financial profile of taxpayers, enabling proactive “nudge” campaigns. These campaigns encourage voluntary compliance by highlighting discrepancies between declared income and financial transactions.
The Foreign Income and Assets Nudge Campaign, for example, prompted 62% of nudged taxpayers to revise returns, leading to declarations of Rs 29,208 crore in foreign assets and Rs 1,089 crore in foreign income. Similarly, the False Claims Nudge regarding Section 80GGC resulted in Rs 963 crore reduction in excess deductions and Rs 409.50 crore in additional taxes.
The updated return facility (ITR-U) has also been a major success. Over 1.1 crore updated returns have been filed, generating more than Rs 11,000 crore in additional taxes as of June 2025.
Tackling Misleading Intermediaries
Recent pan-India search operations targeted intermediaries and facilitators who mislead taxpayers into making incorrect claims or exemptions. This exercise flagged patterns of fraudulent deductions and exemptions, leading to the identification of over 1.5 lakh PANs.
The CBDT emphasizes the importance of taxpayers providing correct email and mobile details, as electronic communication is the preferred and most efficient method. Incorrect contact information, often provided by intermediaries, can lead to taxpayers missing crucial communications and facing adverse consequences.
Smarter Scrutiny & Privacy Protection
The Computer Assisted Scrutiny Selection (CASS) system ensures efficient and objective selection of tax returns for scrutiny. Only about 0.3 percent of all returns are selected, reflecting the department’s “Trust First and Scrutinise Later” philosophy, which focuses on high-risk cases.
Regarding privacy concerns, particularly with the new Income Tax Bill, the CBDT assures that data is scrutinised in a sanitised environment by authorised personnel. Procedures are being tightened to redact private information and only investigate relevant financial data, maintaining evidentiary value while respecting taxpayer privacy.
Clearing the Backlog of Appeals
The department faces a pendency of about 5.5 lakh direct tax cases. To address this, various steps have been taken, including the Vivad se Vishwas Scheme 2024, which saw 40,000 participants.
The CBDT has expanded the number of commissioner appeals and principal commissioners handling appellate work. They are also profiling appeals with similar issues to identify “low-hanging fruits” for faster disposal. In FY25, 1.75 lakh appeals were disposed of, a significant 55.18 percent increase over the previous year, with disposals exceeding new appeals for the first time. The target for this year is over 2 lakh disposals.
- The CBDT is confident of meeting its FY26 direct tax collection target, banking on economic growth and improved tax administration.
- Digital initiatives like Annual Information Statements (AIS) and AI-powered analysis are central to boosting compliance and identifying discrepancies.
- Proactive “nudge” campaigns and the updated return facility (ITR-U) have yielded significant results in collecting additional taxes.
- Recent operations have targeted intermediaries facilitating incorrect tax claims, highlighting the need for taxpayers to be cautious and provide correct contact information.
- Only a small percentage (0.3%) of tax returns are selected for scrutiny, with a focus on high-risk cases and enhanced privacy protocols for data handling.
- The department is aggressively tackling the backlog of 5.5 lakh pending appeal cases, having significantly increased disposals in the last fiscal year.
These efforts underscore the Income Tax Department’s commitment to a more digitized, efficient, and taxpayer-friendly compliance system.
