The character of the Union government’s annual Budgets has changed over the last few years. Increasingly, they are less about taxes and more about the government’s fiscal stance, schemes and expenditure priorities.
The big focus in the Budgets, therefore, is on the government’s plans to reduce its debt or fiscal deficit, change sectoral policies, launch new schemes, and improve the quality of its expenditure. Budgets are now tracked and assessed as the government’s annual economic policy statement, which also releases financial numbers to back it up.
Of course, there are a few changes in the taxation regime in most Budgets, but these have become fewer over the years.
This is a welcome development. As the economy grows, frequent changes in taxes are not a good idea. The absence of major adjustments in tax rates has also meant a decline in general interest in the annual budgets, with less curiosity about what they contain. Clearly, taxation reforms of the last many years have contributed to that process.
Consider the following. Since the launch of the goods and services tax (GST) in 2017, over a fourth of gross tax collections by the Union government have gone outside the purview of the Budget presented by the Union finance minister. Indirect tax changes used to be one of the main reasons for the huge interest in Budgets of the past. But now the GST rates for goods and services are changed outside the Budget through periodic meetings of the GST Council. The Budget only captures the impact of such changes in terms of revenue collection.
Only two major indirect taxes, central excise and Customs, continue to be decided by the Union finance ministry on its own. But even here, excise duty changes are often announced outside the Budget. A steep increase in excise duty on cigarettes and a new cess on pan masala (which used to be a major area of interest in the past), were announced well before the Budget in December 2025 through an amendment in the excise law and a new piece of legislation. Note that the new excise rates and the cess, which will yield substantial additional revenue for the government, will take effect from February 1, the same date when the Budget is to be presented. In the good old days, cigarette tax rates would be announced along with the presentation of the Budget, giving rise to a lot of excitement and causing shortages due to hoarding of cigarettes by unscrupulous elements in the hope of making an extra buck. None of that excitement takes place now.
That leaves the Customs duty, where there is still some element of surprise. What could attract a higher Customs duty, or a lower levy continues to be a major reason why trade and industry keenly watch the Budget announcements. In the last two Budgets, Customs duties were rationalised, and the expectation is that the same trend will continue in the forthcoming Budget as well.
What has also caused a decline in interest and the surprise element in the Budget is that India has embraced a stable direct tax regime for both individuals and companies. After the last Budget’s announcement of a major tax relief for those earning an annual salary of less than ~12 lakh, there is not much that individuals can look forward to in the forthcoming Budget. Companies, too, can hardly expect a major rejig in their tax rates. The new capital gains tax regime, introduced a couple of years ago, has by and large been accepted by the markets and the government can ill afford to bring about any further change there and upset the market sentiment. There may still be changes in different direct tax provisions to encourage investments or savings, but these will be marginal changes and, therefore, may not hold the same appeal as the recent increase or decrease in indirect tax or direct tax rates per se. In any case, a big relief in direct tax rates in 2026-27 will be a challenge, given the deceleration in the growth of tax collections this year.
So, what can change in the 2026-27 Budget, to be presented in just about a fortnight from now? One, the fiscal consolidation plan will now have to focus not just on deficit reduction, but also on reducing the government’s overall debt. Indeed, it will be the debt target that the government will now be focusing on, and the fiscal deficit will be an outcome of that debt reduction plan.
The second significant change could be noticed in the nature of the Centre’s fiscal engagement with the states. Remember that the recommendations of the 16th Finance Commission are with the government, and these will be reflected in the way fiscal resources will be shared with the states. Almost a decade ago, Arun Jaitley’s second Budget — for 2015-16 — accepted a major recommendation of the 14th Finance Commission to increase the share of states in central tax collections from 32 per cent to 42 per cent — the steepest such increase ever. This change meant a significant increase in the devolution of taxes to the states. The Union government, however, began raising cesses and surcharges, which were not to be shared with the states. These over the years have contained the effective increase in tax devolution to the states.
The 2026-27 Budget will have to incorporate the recommendations of the 16th Finance Commission, which will be implemented for five years from April 2026. The Commission is unlikely to reduce the states’ share in central taxes from 41 per cent, as fixed in line with the recommendations of the 15th Finance Commission from April 2020. But there may be significant implications for the resources of both the Union and the states because of the devolution formula adopted by the Commission. The actual impact will of course be known only on February 1.
But the third and a bigger change could be seen in the way the Union spends its resources for centrally sponsored and central sector schemes. About 24 per cent of the Union Budget’s total expenditure in the current year is earmarked for 54 centrally sponsored schemes and 260 central sector schemes. A review of these schemes has been undertaken to decide how they should be continued and in what form over the next five years i.e. from April 2026.
Many of these schemes are likely to be either pruned, merged or even dropped. The sharing of the burden of expenditure on these schemes will undergo a change. Already, the states’ share under the modified and renamed rural employment guarantee scheme has been increased through a legislative change in the last session of Parliament. It is likely the states will have to end up contributing more to the schemes that are retained. The Union ministries will also have to modify or even downsize the schemes depending on how well they have been implemented so far.
The expectation is that the savings generated from the review of these schemes would give the Union Budget greater leeway in allocating more resources under its capital expenditure programme, which, in any case, is likely to see a greater share of allocations directed to states under interest-free loans, linked as they are to the implementation of specified reforms. The resultant rejig of these schemes in the forthcoming Budget may well be one of the most significant expenditure reform measures, impacting almost a quarter of the government’s total annual spending. That will once again show how annual Budgets have moved away from merely effecting tax changes and are focusing more on fiscal and expenditure reforms.
AK Bhattacharya is the Editorial Director, Business Standard. He tweets @AshokAkaybee. Views are personal.