A modest percentage, 0.3%, of income tax returns undergo further investigation
The Central Board of Direct Taxes (CBDT) is gearing up to meet the ambitious Rs 25.2 lakh crore direct tax collection target for FY26, with a focus on intensifying its enforcement and recovery efforts.
In the first quarter of FY26, the CBDT has already recovered Rs 20,000 crore in outstanding dues, nearly double the amount collected in the same period last year. The recoveries have been primarily from corporate tax arrears (Rs 17,244 crore), followed by personal income tax and TDS shortfalls.
Officials are confident enough to set a target of Rs 2 lakh crore in total recoveries for the year, which provides a significant boost without needing to raise tax rates or cut development expenditure.
To ensure a fair and transparent selection process, the CBDT uses the CASS (Computer-Assisted Scrutiny Selection) system for picking tax returns for scrutiny. This system employs advanced data analytics to detect anomalies, and typically, only 0.05% to 0.2% of total annual returns filed are selected. Upon selection by CASS, scrutiny notices are generated and issued centrally to maintain integrity and confidentiality.
The department operates on a "Trust First and Scrutinise Later" philosophy, focusing on high-risk cases rather than random selection. The "nudge" approach is the preferred first step for taxpayers with minor discrepancies or potential omissions, aiming to encourage voluntary compliance. Decisions to invoke intrusive options are not taken lightly and are based on a rigorous internal approval process.
Intrusive steps are reserved for cases with credible intelligence or significant evidence of large-scale tax evasion, concealment of income, or involvement in illicit activities. The goal is to create a deterrent effect for willful defaulters while fostering a climate of trust for the honest taxpayer.
The government has also raised the Cost Inflation Index to 376 for FY26, which reduces the capital gains tax burden on asset sales by accounting for inflation, potentially encouraging compliance and investment.
Despite a slight moderation in overall collections with net direct tax mop-up down 1.3% between April 1 and July 10, 2025, the increase in enforcement recoveries and a focus on squeezing revenue from existing tax bases are key strategies behind targeting a 12.7% increase in direct taxes to Rs 25.2 lakh crore for FY26.
The CBDT has set a target of disposing of more than 2 lakh appeals this year, with over 1.75 lakh appeals already disposed of last year. The moderation in direct tax collections so far in FY26 is primarily due to higher refunds.
With the ITR filing deadline shifted from July 31 to September 15 in the current year, taxpayers have more time to comply and contribute towards meeting the FY26 target. The CBDT is hopeful of meeting the target despite the moderation in collections.
- The intensified focus on enforcement and recovery efforts by the CBDT, concerning finance and business, aims to boost direct tax collection to a significant amount, even without increasing tax rates or cutting development expenditure, as seen in the market.
- The government's decision to raise the Cost Inflation Index to 376 for FY26, which reduces the capital gains tax burden and encourages compliance and investment, is one of the strategies implemented in the economy.
- In the decentralized financial (DeFi) landscape, the CBDT's "Trust First and Scrutinise Later" philosophy and the CASS system's use of advanced data analytics for detecting tax anomalies serve as examples of how regulatory bodies can operate efficiently while fostering trust within the market.
