The revenue from direct taxes has shown high buoyancy since tax reforms were initiated in 1991, but there has been no such improvement in the indirect taxes both in terms of administration and enforcement.

Tax Reforms are very crucial to the reforms process. One of the most serious problems of central finances has been the declining GTR (gross tax revenues)-GDP (gross domestic product) ratio, which declined by almost two percentage points from 10.3 per cent in 1991-1992 to 8.1 per cent in 2001-2002, and then recovered to nine per cent in 2003-2004, and reached a level of 11.4 per cent in 2006-2007 and improved further to 11.8 per cent during 2007-2008. It is expected to reach a height of 13 per cent or so during 2009-2010 fiscal.

In time to come it is expected that it would further move up. This has happened because of the structural shift in the Central Government's ability to mobilise resources. Such a shift enhanced revenue mobilisation through reasonable rates, better compliance and widening of the tax base is yielding tangible results.

In this context we must also remember that the revenue from direct taxes has shown high buoyancy since tax reforms were initiated in 1991, but there has been no such improvement in the indirect taxes both in terms of administration and enforcement. But even this high GTR-GDP ratio is too low as compared to other developing countries.

The revenue from direct taxes has shown high buoyancy since tax reforms were initiated in 1991, but there has been no such improvement in the indirect taxes both in terms of administration and enforcement. The last years budget had completely ignored these issues.

The low GTR-GDP ratio has put a serious limitation on the governments expenditure, because in terms of the FRBM (Fiscal Responsibility and Budget Management) Act there is no scope, whatsoever, for additional borrowings. We must also keep in mind the fact that, in the present tax structure, a) there are only four major taxes (both direct and indirect) that account for the government revenue.

The largest is the excise duty, followed by the corporation tax, customs duty and income tax in that order, b) the manufacturing industry is the basic source of these taxes and duties, c) with a one-fourth share in GDP, industry provides three-fourths of GTR to the government, d) the value of all these taxes and duties depend on the value of output and hence on their prices (ie higher is the value of output/ higher is the inflation, higher will be the revenue); inflation, in fact, increases both revenues and expenditure, and, as such, it does not actually help in the desired way, and e) agriculture and many other services have always been outside the tax net.

The budgets over the last few years have initiated little bit of tax reforms in order to mobilise higher tax revenues. The introduction of countrywide VAT (value added tax) from April 2005, has contributed, though marginally, to higher tax revenues.

Despite the fact that the forthcoming budget will be greatly affected by the on-going world-wide recession basically because of the financial melt down essentially because of the weakening of the capital market, low liquidity and lack of confidence, it should be vigilant and look at the other sources of raising revenue like increasing the tax net of income tax, extending it to the agricultural sector, where most of the urban income gets invested by the so-called richer people with a view to avoid taxation.

Such steps will surely push up the GTR to higher levels and push the economy towards macro economic stabilisation and achieve higher rate of economic growth.There is no doubt that the tax reforms will surely have their fall-outs on the common man.

The government, therefore, will have to strike a trade off between the tax reforms and their short-run fall-outs on the common man. This will best be achieved by assuring that the benefits of growth, no matter what the rate of growth is, reach the masses through percolation (trickle down process) in terms of say, low prices of things of daily use, low taxes for the common man and reasonably attractive interest rates (within the present day policy of low interest-rates-regime) and also in non-monetary terms like, basic social provisions, day-to-day security, effective law and order situation, public discipline and responsibility, and elimination of rent-seeking nefarious activities. No doubt, such a trade off is a difficult exercise, but it is not impossible.

If the government has a strong will and realises its responsibility towards the well being of the nation, an optimal trade off can be achieved. In case such a trade off is not worked out, the tax reforms would be really hard for the people in various ways.