Indian tax authorities have continued to raise tax demands, both in direct and indirect taxes, resulting in a strong growth in unrealised tax demands in recent years. Budget documents show that such unrealised tax demands amounted to more than ₹38 lakh crore towards the end of FY25.
A businessline analysis of the Union Budget documents shows that these demands have been higher in direct taxes, with unrealised demands growing at a compound annual growth rate (CAGR) of 26 per cent between FY20 and FY25. Growth in unrealised demands in indirect taxes was at a slower pace of 8.7 per cent annually over the same period.
Direct tax demands outpace collections
The growth in unrealised direct tax demands has been striking, from ₹11 lakh crore in FY20, the figure rose to approximately ₹36 lakh crore in FY25, about a three-fold increase. Within this, income tax-related unrealised demands alone reached ₹19 lakh crore in FY25, growing faster than unrealised corporate tax demands, which stood at ₹16 lakh crore.
In comparison, unrealised indirect taxes grew at a slower pace, reaching ₹2.6 lakh crore in FY25 from ₹1.7 lakh crore in FY20. This divergence suggests that the bulk of aggressive tax assessments is concentrated in direct taxes, which raises concerns about the structural issues in tax administration.
The inordinately high backlog of unrealised tax demands suggests frivolous tax demands being issued by the IT department in a bid to meet tax revenue targets. With 44 per cent of these demands being under litigation, the enforceability of these demands is also under question.
Furthermore, in some cases, large demands are raised but remain unrealised for years, suggesting overestimation at the assessment stage. The contrast with indirect taxes, where collections are more transaction-based and harder to dispute, further highlights this imbalance.
Most unrealised taxes are recent and undisputed
A closer look at the composition of unrealised direct taxes reveals that more than half of it is not under dispute. As of FY25, about 56 per cent of unrealised taxes are undisputed.
Importantly still, a large share of these demands is relatively recent. Around 21 per cent of undisputed taxes have been outstanding for 1-2 years, while another 17 per cent fall in the 2-5 year bracket. Even among disputed taxes, the largest shares lie within the 1-5 year range.
However, about 6 per cent of undisputed taxes and about 1.6 per cent of disputed taxes have been pending for over a decade, indicating long-standing inefficiencies in resolution and recovery.
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