With direct taxes contributing more than 60 per cent to the governments tax kitty, the finance ministry is setting up an expert panel to design a revenue forecasting model which will be aligned with the overall planning exercise.

A senior finance ministry official told Business Standard that Chief Economic Advisor Kaushik Basu would be heading the panel, which will suggest ways for creation of database, time-frame for revenue forecasting and also the scientific model to be adopted by the Central Board of Direct Taxes (CBDT) for this purpose.

The expert committee will have representation from various critical segments. Principal advisor to the Planning Commission, Pronab Sen, and N R Bhanumurthy from the National Institute of Public Finance and Policy will be part of this expert committee on revenue forecasting (ECRF).

ECRF will submit its report by June 30. The officials from the Income Tax Department in the committee would include a joint secretary in tax planning, Ashutosh Dikshit; director in the international tax division, Sanjay Kumar; director in organisation and management services division, Nilimesh Baruah; and director in the investigation department, D K Gupta.
 
M C Joshi, member (legislation and computerisation) of CBDT, would coordinate the whole exercise. Direct taxes, now the major source of tax revenues to the central government, have grown at an average annual rate of 24 per cent in the last five years and have nearly trebled from Rs 1,32,771 crore in 2004-05 to about Rs 3,78,000 crore in 2009-10.

The contribution of direct taxes to the central tax revenues has grown from 43.79 per cent to 60.5 per cent during the same period. The ratio of direct taxes has increased from 4.1 per cent of gross domestic product (GDP) in 2004-05 to 6.1 per cent in 2009-10.

The Thirteenth Finance Commission (2010-15) has projected direct tax revenue collection at Rs 8,29,668 crore by 2014-15 and the direct tax-to-GDP ratio at 7.62 per cent.

The finance ministry official said the idea was to capture economic conditions in the revenue forecasting process and align it with the governments planning. He added that the department in its vision document had outlined this measure and constitution of the committee was being done to implement it. The Income Tax Department (ITD), in its Vision Document 2020 and Strategic Plan 2011-2015 document, said the first step for optimisation of revenue mobilisation was to ascertain the true tax base of the country.

ITD intends to develop a revenue forecasting model by identifying the tax base and the variables influencing direct tax revenue from the perspective of tax administration, says the Vision Document.

The Vision document pointed out that the existing revenue forecasting models used were conceptualised from a slightly different perspective without explicitly focusing on administrative aspect of tax policy. It further stressed that a customised model for ITD might identify and use variables affecting the compliance level explicitly, in addition to the GDP used as a proxy for the tax base.

As the action point to address this issue, the department decided to constitute the expert group for developing a revenue forecasting model with departmental officers and outside experts including economists, statisticians and other government agencies before the end of the financial year 2010-11.