Examine the relative shares of direct and indirect tax revenues of Indian Government in the post-reforms…

Question

Examine the relative shares of direct and indirect tax revenues of Indian Government in the post-reforms period.

Ghissu Editorial · Accepted Answer

Post-reform, direct taxes rose steadily to over 58% of total tax revenue in the 2024-25 revised estimates, while indirect taxes, over 80% before reforms, fell relatively. The shift, driven by growth, formalisation and better administration, made taxation fairer, while GST kept indirect revenue buoyant.

**Introduction**

India’s post-1990s economic reforms transformed its tax structure, increasing direct tax revenue share and addressing equity and efficiency concerns. This shift reflects broader liberalization and efforts to create a more balanced fiscal framework supporting inclusive growth.

**Trends in Direct Taxes**

2. **Systemic Weaknesses⟦1⟧ Highlighted**: ==The Andhra Pradesh⟦4⟧⟦3⟧⟦2⟧ CAG audit revealed ₹1,806 crore revenue impact from underassessment in 2021-22,== reflecting challenges in tax administration despite reforms like faceless e-assessment and the “Transparent Taxation - Honouring the Honest⟦5⟧” initiative. Pending appeals and arrears remain high, with 97% of uncollected direct tax demand considered difficult to recover, underscoring the need for continued administrative strengthening.

**Trends in Indirect Taxes⟦6⟧**

1. **Declining Share but Enhanced Efficiency**: Indirect taxes dropped from over 80% pre-reforms; GST collections rose from ₹0.90 lakh crore (FY18) to ₹1.49 lakh crore (FY23), improving revenue buoyancy and market integration by creating a seamless national market and reducing logistics costs.

**Comparative Analysis**

2. **Complementary Tax Roles**: Direct taxes enhance progressivity and are non-inflationary; indirect taxes provide stable revenue and are easier to administer. Reforms seek to balance revenue needs with fairness by rationalizing indirect tax rates and expanding direct tax compliance.

**Conclusion**

India’s tax reforms have shifted revenue reliance towards direct taxes, improving equity while necessitating continued administrative reforms for efficiency and compliance. Sustained efforts are essential to strengthen tax governance and support inclusive economic development.

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