Relationship between Level of Per-capita Income and the Share of Direct Taxes in Tax Revenue in India-the Recent Trends and Implications

Abstract

Tax revenue, collected through direct and indirect taxes, forms the major part of the annual revenue of the Government. The relative shares of these two groups of taxes in the total tax revenue of the government vary depending on the level of economic development of the country. It is generally held that in an underdeveloped country with low level of per-capita income and low taxable capacity of the people the share of indirect taxes in total tax revenue is high relatively to the share of direct taxes. As the economy of the country develops and the level of per capita income goes up, bringing a larger section of the population within the direct taxes’ net, the share of direct taxes in total tax revenue tends to rise. This paper attempts to examine whether this generally held view is applicable to the Indian economy also. This it does by regressing the share of direct taxes in total tax revenue on the level of real per capita income of the country using a simple two variable linear regression model. The period covered by the study is the fifteen year period from 200001 to 2014–15, and the study finds that the direct relationship between the level of real per capita income and share of direct taxes in total tax revenue holds good in the Indian economy as well.