The topic of taxation has experienced a comprehensive change of structure since last many years. With the beginning of supply side taxation, role of taxation has become more significant. Taxation is not only an effective instrument for resource mobilization — a “boot strap operation for financing economic development-but also a ‘tool kit’ for revenue collection to sustain growth and maintain equity and stability in the economy. If blood circulation is essential to keep the human body alive so is taxation to keep the economy alive. Developing countries suffer from dearth of revenue because of low taxable capacity as the majority of people live below the poverty line with hardly any capacity to pay taxes to the government. On top, legal base of taxation is condensed with unrestricted tax shelters and tax administration is short of modern mechanism to spot new tax payers and bring them into the orbit of tax- net. According to the theory of structural change of taxes during the developmental process, the contribution of direct taxes will grow with the rise in per capita income, in turn the contribution of indirect taxes will comparatively slow down. Direct taxes have tactical importance and its preference over indirect taxes is claimed on the ground of neutrality, welfare and excess burden. With time, it has been established that direct taxation gives the best accountability degree which translates to good governance, whereas indirect taxation have less tangible effects. International comparisons of contribution as a percentage of revenue to GDP in developed and developing countries are as follows: - Tax/GDP ratio of Sweden was found to be 49.7 percent in 2008, while it was 50.0 percent in Denmark, 46.8 percent in Belgium, 36.5 percent in New Zealand, 28.2 percent in USA, 27.4 percent in Japan, 26.8 percent in South Korea, 20.5 percent in Mexico, 17.7 percent in India, 10.6 percent in Pakistan, and 11 percent in Nepal in the same period. (2009 index of economic freedom, Heritage Foundation)The major broad objectives of tax policy are: to create an environment for rapid economic growth, by minimizing luxurious consumption expenditure and directing the resources where yield is higher and the goods produced are socially acceptable; it can be employed to control inflationary and deflationary tendencies in the economy at the primary stage; minimize inequality of income and wealth through redistribution of income; it can increase employment opportunities by giving tax rebates and concessions to industries that have high employment generation potential; and have built-in-flexibility into the tax structure by mobilizing direct taxes. A central concern of tax policy in developing economies is how best to generate adequate revenues to finance public sector activities without unjustifiably discouraging the private sectors’ essential contribution to growth. In this aspect, South Asian countries gradually discarded interventionist approach and followed reductionist approach to revenue mobilization in accord with the aspects of liberalization visualized by W.T.O. and SAFTA necessities after 1990. In developing economies, tax system suffers from structural constraints with remarkable administrative and procedural complexities that lack simplicity and transparency. A tax system is said to be perfect and successful, when additional revenues is mobilized without creating additional burden to the tax payers with no change in tax rates and legal base and with modest discretionary changes attributing to improving efficiency in tax administration. Unfortunately, tax fraud, evasion, concealing revenues, corruption, poor tax collection procedures, fund leakages, embezzlement, fabricating expenditures are the financial parasites. The boundary between losing ground administrative competence and increasing law-breaking delinquency are becoming poles apart and become discerning in developing economies. The government has to look through the prism of a new moral perception to keep up with altering times. In developing economies, corruption has accelerated, poverty and disparity escalated, and everyday life in developing countries is facing complication which warrants big concern. The prevalence of democratic, unwavering political will-power and positive government is a requirement for successful implementation of any tax system for competent and efficient tax administration to execute the policy and capability to collect taxes both at the centre and local level. Developing economies must work in close partnership with private sector creating conducive environment to captivate foreign direct investments (FDI’s) through the provision of viable competitive packages of tax incentives which assist in diversifying investment to developing regions across the world, in order to ensure better lives for their people. Dr Rana is an economist specializing in Taxation Policy in Nepal