Tax revenues are the backbone of government finances, yet a significant portion of these revenues remains unrealised. When funds are locked up in legal and administrative limbo, it creates a fiscal drag that stifles public infrastructure and welfare initiatives.
Tax revenue raised but not realized stood at ₹38.4 trillion at the end of FY25—30.5% higher than last year. It has grown nearly 200% since FY20. Tax unrealized has two parts: tax under dispute, which means taxes are under some kind of legal dispute, and tax not under dispute, which largely refer to arrears but are out of legal dispute.
In recent years, the rise in unrealized tax has come largely on the back of taxes not under dispute, which made up more than 50% by FY25, sharply up from less than 20% in FY20.
This is not to say that taxes under dispute have not risen, but at a much slower rate. While tax not under dispute rose 30.5% year-on-year in FY25, tax under dispute increased 16.2%. To put the number in context, tax under dispute increased by ₹2.5 trillion in FY25, which is about 6.6% of the about ₹38 trillion in gross tax collections for FY25.
The share of undisputed tax has risen in recent years after the government’s voluntary settlement schemes, especially Vivad Se Vishwas. Experts noted the government's Vivad Se Vishwas played a major role in reducing disputes. The first round of the scheme settled nearly ₹1 trillion in disputed direct taxes across over 0.13 million cases, according to finance ministry data.
“Faceless assessments and appeals have reduced jurisdictional bias and improved the quality of assessments to some extent (leading to fewer disputes),” said Aditi Goyal, a partner of tax practice at Trilegal.
A second scheme was launched in 2024. Though some experts believe the second version introduced cut-off dates and tighter conditions, forcing taxpayers to either settle all disputes or contest all of them.
While there are signs of a progressive compositional shift, experts are still cautious since the amount under dispute has kept rising. "The tax which is not under dispute has increased sharply, which makes the disputed amount appear smaller in relative terms. However, in absolute terms, the tax under dispute has not declined," said Sandeep Bhalla, partner at Dhruva Advisors.
In Budget 2026, the government announced more measures to ease tax compliance. These include simpler filings, longer deadlines and lighter penalties under the New Income Tax Act, 2025, which will come into effect from April.
Within the disputed amount, corporate taxes still account for the lion’s share – 51% in FY25 – while income taxes account for 37%. The share of income tax under dispute has fallen below 40% since FY23.
The share for corporate taxes has risen to more than 50% since FY24. Experts say a steady rise in the number of insolvency and bankruptcy cases has hindered state’s ability to enforce and realise assessed taxes over the years. Data from the Insolvency and Bankruptcy Board of India (IBBI) show that insolvency initiations have risen sharply over the past decade, from just 37 cases in FY17 to 733 in FY25.