EFFECTS OF INDIRECT TAXES ON ECONOMIC GROWTH, EVIDENCE FROM PAKISTAN

Abstract

Purpose: The basic purpose of this research study is to find out the indirect taxes (Domestic Goods and Services Tax (DGSTAX) and Custom and Excise Duty (CEXTAX)) on the economic growth of Pakistan. Previous researchers did not work on the effect of indirect taxes as whole. Methodology: This is an explanatory and longitudinal research based on time series data. The data was collected from 1977 to 2016. sample size utilized under this study is 40 years. Secondary type of have been used to collect the time series data from government offices and the websites of Inland revenue department, economic survey of Pakistan, World bank and from inland revenue department. Statistical Tools: Stationary test has been applied to check the trend in variables. Cointegration, ARDL bound test has been applied to determine the long run relationship between variables. Regression analysis has been used to significance level and direction of the variable. Stability test has been applied to determine the stability of the model. Granger causality analysis has been used to check the causal relationship between variables. Error correction model has been applied to determine the short term relationship between independent variables (Domestic Goods and Services Tax (DGSTAX) and Custom and Excise Duty (CEXTAX)), control variables (Inflation Rate (INFR), Corporate Tax (CORTAX), Income Tax (INCTAX), Population growth (POP), Corruption Index (CPI), GIN I Index (GINI) and Government Expenditure (GEXP) and dependent variables (Gross Domestic Product (GDP)). Findings: From the derived results, it has been concluded that Domestic Goods and Services Tax (DGSTAX) and Custom and Excise Duty (CEXTAX) have significant and positive effect on economic growth of Pakistan. Corporate Tax (CORTAX), Population Growth (POP) and Income Tax (INCTAX) have significant and positive effect on economic growth (GDP) of Pakistan, Other control variables, inflation rale (INFR), Corruption Index (CPI), GIN I Index (GINI) and Government Expenditures (GEXP) all have insignificant and negative effect on GDP of Pakistan.