Countries around the world are increasingly recognising that the effective revenue system is the most important factor for economic development. Factors effecting revenue potential measured as the revenue to GDP has been one of the most important issues that concerns to policy-makers from last three decades. Many developing countries face difficulties in generating sufficient revenues for public expenditure. In some countries budget deficits and the unproductive use of public expenditures have narrow the vital investments in both human resources and basic infrastructure that are necessary for providing base for sustainable economic growth and development. Too much dependence on foreign financing may cause problems of debt sustainability; therefore developing countries will need to depend substantially on domestic revenue generation. There is a large body of literature on tax revenue potential in developing countries [Bahl (1971); Tanzi (1987); Leuthold (1991); and Stotsky and Mariam (1997); Gupta (2007)]. However, there is few studies that examine institutional and governance quality as a factor influencing tax collection and tax revenue potential. According to Tanzi and Davoodi (1997) and Gupta (2007) these factors are responsible for low tax collection in developing countries by allowing citizens inappropriate tax exemptions and enabling tax evasion due to bad tax administration. Therefore, a precondition for ensuring adequate revenue collection is a legitimate and responsive institutions following the rule of law with control on corruption and having high quality bureaucracy to administer. Studies also confirm that a strong political will to reform is required for successful reform process [Bird (2004)]. Alm, et al. (2003) suggest that tax records of countries are reflection of their political or societal institutions.