An advisory committee on tax policy and tax administration, chaired by Mr Parthasarathy Shome, has just submitted its report to the Planning Commission. The main recommendation of the report is said to be the imperative need to broadbase the tax structure. The committee has recommended that a number of existing tax concessions should be eliminated and newer sectors should be brought into the tax net. It was perhaps no coincidence that while speaking at a seminar organized by the Federation of Indian Chambers of Commerce and Industry, Mr Shome suggested the need to bring the information technology sector into the tax net. The IT sector is the fastest growing sector in the economy. The agricultural sector remaining virtually untaxed at least in so far as direct taxes are concerned. Personal income taxes are paid by less than two per cent of the population. Hence, the bulk of direct taxes is paid by an increasingly small sector of the economy. This is an unhealthy development because it means that an overwhelming fraction of the government's tax revenues come from indirect taxes. In fact, customs duties alone account for roughly 30 per cent of total tax revenues. The corresponding figure in most east Asian countries is 10 to 15 per cent. The undue reliance on indirect taxes is undesirable for at least two reasons. First, it impairs the allocative role of taxes. Second, there is also the issue that direct tax rates can be more easily adjusted in order to increase the progressivity of the overall tax regime, thereby ensuring that the relatively more affluent pay proportionately more taxes than the poor. The suggestion to tax the IT sector may seem preposterous at the present juncture. After all, even Infosys has sounded dire profit warnings and the IT sector as a whole is facing a gloomy future in view of the impending slowdown in the United States economy. On the other hand, there is no reason why the IT sector should be exempted from paying tax on the profits earned by it since other industries do part with a share of their profits. If the US slowdown or other factors lower profits of the IT sector, then the tax burden will also be correspondingly lower (once a tax is imposed on the sector). Unless the tax base is widened, there is no way in which direct tax revenues can be increased steeply. There is also a temptation to increase rates of personal income taxes since we are no longer in the regime of absurdly high rates where the highest marginal tax was 97.5 per cent. Now that even the highest rate of taxation is quite modest, the incentive to evade taxes is low, and so the temptation to raise income tax rates should be resisted. A careful analysis must also be carried out about the desirability of maintaining the existing exemptions.