An ideal tax system should depend more on direct taxes than indirect taxes. This is primarily because direct taxes are considered to be progressive while indirect taxes are regressive.
One of the central goals of tax reforms in the 1990s was to make the system more progressive. The composition of our tax revenues has changed considerably over time.
The graph here shows the percentage contribution of direct and indirect taxes to gross tax revenue since the Union Budget for 1996-97. From the budget documents, we combine corporation tax, taxes on income and wealth tax under direct taxes. For indirect taxes, we club customs, union excise duties, service tax, taxes on union territories and other miscellaneous taxes.
Indirect taxes constituted 71 percent of gross tax revenue in 1996-97. We can then divide the graph into significant two time periods - before and after 2009-10. In the years preceding 2009-10, there was a welcome decline in the contribution of indirect taxes -- to 39 percent in 2009-10. There was a corresponding increase in the contribution of direct tax. In 2007-08, direct tax ended up constituting a greater proportion of total tax revenues than indirect tax.
This heartening trend reversed after 2009-10. The contribution of direct tax to revenue collection has been declining. It eventually dropped below 50 percent in 2016-17, with indirect taxes once again becoming more important.
A lot of attention will be focussed in the coming Union Budget on the total taxes collected by the government. At least some of that attention should be diverted to the question of where the money is coming from -- progressive direct taxes or regressive indirect taxes?