The Income Tax Department is increasingly turning to data analytics and information available under the Goods and Services Tax (GST) framework. The move comes at a time when recent reductions in personal income tax rates have moderated direct tax revenue growth during the current financial year.
Officials familiar with the developments said the department is focusing on improving voluntary compliance by tapping into the vast digital trail generated by the GST system. The indirect tax regime captures granular data at every stage of the value chain — from production and wholesale transactions to goods transportation — through real-time reporting on a centralised portal. This data ecosystem has already played a key role in detecting fake invoicing networks and curbing tax evasion under GST.
Now, the direct tax administration aims to harness this information to identify discrepancies in income reporting and encourage self-correction among taxpayers.
‘Nudge’ Approach Gains Momentum
The department has been increasingly relying on a behavioural compliance strategy commonly described as the “nudge” approach. Under this model, taxpayers are informed about potential mismatches or under-reporting detected through data analytics and are given an opportunity to revise their returns voluntarily before any formal enforcement action is initiated.
Officials indicated that improved data intelligence and targeted outreach are central to revenue mobilisation. “Revenue collection depends on efficient administration and the ability to connect with relevant taxpayers. The stronger the data systems, the stronger the revenue outcomes,” said a senior official, adding that leveraging technology platforms such as GST is critical to this effort.
The emphasis, according to sources, is not merely on collecting information but on converting actionable data into revenue through calibrated communication. Authorities are evaluating how frequently and in what manner they should engage different categories of taxpayers to maximise compliance without making the system adversarial.
Queries sent to the finance ministry and the Central Board of Direct Taxes (CBDT) for official comment did not elicit a response at the time of publication.
Slower Growth Triggers Compliance Push
Direct tax collections have grown by less than 5% year-on-year in FY26 (up to 11 January), underscoring the need to expand voluntary compliance. The moderation follows personal income tax rate cuts introduced this fiscal to stimulate consumption.
Deepashree Shetty, Partner, Global Mobility Services – Tax & Regulatory Advisory at BDO India, said a trust-based framework backed by technology can significantly enhance compliance levels.
“Behavioural interventions like the nudge campaign have already shown results by encouraging non-intrusive self-correction. Expanding these efforts through deeper analytics, pre-filled returns, and seamless digital interfaces can ease compliance and improve accurate income disclosures,” Shetty noted.
According to tax professionals, simplifying compliance processes and reducing friction points can lower the administrative burden on taxpayers, thereby strengthening overall reporting standards.
Revised Revenue Target Likely to Be Achieved
Despite the slower growth, officials expressed confidence that the revised direct tax collection target of ₹24.2 trillion for the current financial year will be met.
In the Union Budget presented on 1 February, the government reduced the direct tax revenue target by ₹1.26 trillion, factoring in the impact of tax rate cuts and softer nominal GDP growth amid cooling inflation.
Looking ahead, direct tax revenues are projected to grow 11% in the next financial year. With nominal GDP growth expected at around 10%, tax buoyancy — which measures the responsiveness of tax revenue to economic growth — is estimated at 1.13, close to this year’s 1.16.
Only 38% of GDP Reflected in Reported Income
Experts point out that India’s direct tax base still reflects only a fraction of total economic activity.
Data from the tax department shows that total income reported by individuals and businesses for FY23 stood at ₹102.5 trillion, compared with a nominal GDP of ₹268.9 trillion — meaning only about 38% of GDP was captured in reported taxable income.
“This clearly indicates there is significant room to widen and deepen the tax base,” said Amit Maheshwari, Managing Partner at AKM Global. “Since tax rates are already competitive, the focus must shift to better income reporting rather than increasing rates.”
Maheshwari added that the department can use employer data, banking records, financial intermediary disclosures, and GST filings to generate pre-filled returns and send data-driven reminders where mismatches are evident. Risk-based analytics can ensure that scrutiny is limited to high-risk cases, reducing unnecessary litigation.
“Gentle nudges within the framework of the faceless and digital income tax system can make compliance easier for honest taxpayers, reduce disputes, and improve voluntary compliance without turning the process adversarial,” he said.
Technology-Led Tax Administration
The strategic use of GST data signals a broader shift toward integrated, technology-driven tax governance. By combining indirect tax intelligence with direct tax analytics, authorities aim to close reporting gaps, enhance transparency, and strengthen revenue stability without raising tax rates.
As India moves toward a more data-centric tax administration model, the success of this approach will depend not only on sophisticated analytics but also on maintaining taxpayer trust and ensuring that compliance measures remain proportionate and non-intrusive.
