Optimal tax system is a strategic goal of every country. Inevitable changes deriving from the new view to the role and function of a modern country have led to a different concept of tax objectives. Taxes are means of implementation of growth and development and their efficiency is an important prerequisite for the development and stability of economy. Personal income tax as means of fiscal policy is important as it can be more easily adapted to personal circumstances of a taxpayer and by reducing the tax base a country can simultaneously achieve increase in income and employees’ stimulation. The objective of this study is to analyse development of direct taxes in the tax system of the Republic of Srpska, its currently valid regulations together with effects of the tax base reduction. In that sense this study examines tax harmonisation and displays comparative analysis of the income tax rate in the Republic of Srpska and EU countries.