A low tax collection adversely affects the economy in several ways :

♤ Regressive tax structure: Low direct tax means increasing share of indirect taxes in total revenue which affect poor.

♤ Reduced legitimacy of the state.

♤ Generation of black money which directly affects the expenditure on capital formation and social security.

♤ Taxation evasion also results in rise of organised crime.

♤ Limits government’s ability to fund social security and developmental schemes.

♤ Less number of tax payers pose limitations to accountability and transparency mechanisms and implicitly penalises the honest tax payers.