The gross tax revenue of the central government comprises direct taxes (income tax, wealth tax and gift tax) and indirect taxes (like excise duty, central sales tax, customs duty, etc.). Tax revenue is likely to be affected by many factors like the rates of taxes/duties, corporate profit/incomes, incomes of persons other than companies, deductions from profit/incomes, exemptions of incomes, inequality in the distribution of incomes, value of production, value of foreign trade (export plus import), number of potential taxpayers, tendency of the people to evade tax, effectiveness of the tax administration in collecting tax and in enforcing the law. The rate of growth in tax revenue depends on the growth/ changes in these factors. This study aims at identifying the determinants of the rate of growth of gross tax revenue of government of India. The findings reveal that the growth rate of the manufacturing sector and change in the rates of taxes have been found to be important determinants of growth rate of gross tax revenue of government of India. The importance of the growth rate of the service sector has increased since 2000-01 as a determinant of growth rate of gross tax revenue.

After independence, the Government of India (GoI) had to face huge expectations of the people but with limited resources. In order to raise resources, the GoI resorted to increasing the tax rates and imposing new taxes. Taxation policy has been used to raise resources to finance investments of the public sector, to finance the developmental schemes, to reduce inequality in the distribution of income, to promote balanced regional development, to promote export for earning foreign exchange and to run the government. The budget for the year 1971-72 had raised the surcharge on income tax to 15% and thereby had increased the top marginal rate of tax (for income above 2 lakh) to 97.75% (Acharya, 2005). But the personal tax collections had remained just over 1% of GDP (Acharya, 2005). The high rate of tax had encouraged tax evasion and generation of black money, and therefore the highest marginal rate of tax was recommended to be reduced to 70% (The Wanchoo Direct Taxes Enquiry Committee Report as quoted in Acharya, 2005). Taxation policy has also been used to encourage setting up of industries by giving tax incentives to protect indigenous industries by making imports costlier and to earn foreign exchange through exports by keeping the customs duties on exports low.

Reforms in taxation have aimed to rationalize the rates of taxes and duties in order to encourage people to comply with the tax laws and earn more, and thus increase the tax base, thereby increasing the tax revenue of the government. The waves of globalization have also forced the government to reduce the rates of taxes and duties. Over the years, and specially after the initiation of economic reforms in 1991, these rates and duties have been brought down significantly. Thus, it has been an interesting question to know how these reforms in taxation have affected the tax revenue of the government and which factors have influenced the growth rate in gross tax revenue of GoI. Hence, this study has been devoted to the identification of the determinants of the rate of growth in gross tax revenue of the central government. The rates of growth of the manufacturing and service sectors, inflation and tax rates have been found to be important determinants of the growth rate in gross tax revenue.

Applied Finance Journal, Determinants, Growth Rate, Government of India (GoI), The Wanchoo Direct Taxes Enquiry Committee, Gross Tax Revenue, Government of India.