Relationship between indirect tax revenue and economic growth for the period 2007 to 2016

Abstract

The main objective of this study was to establish the relationship between indirect taxes revenue and economic growth in Uganda for the period 2007 to 2016. The study also determined the buoyancy and elasticity of indirect tax revenues. The approaches used were the Error Correction Model for short run relationship and Engle and Granger causality test for the long-run causal effect between the variables. The variables were; Gross Domestic Product (GDP), excise duty revenues, value added tax revenues and customs revenues. In the long-run, there is a positive significant relationship between customs duties and GDP. The study also revealed a long-run positive insignificant relationship between VAT and GDP. However, the relationship between excise duties and GDP was negative and significant. In the Shortrun, the results revealed that holding other factors constant, a 1 percent increase in total customs duties leads to 0.387 percent increase in GDP. However, a 1 percent increase in excise duties and VAT leads to declines of 0.654 percent and 0.057 percent in GDP respectively. The Granger-causality tests revealed the presence of a uni-directional causality from excise duty to economic growth. A similar uni-directional causality was observed from economic growth to customs duties and VAT. The coefficient of elasticity indicates that a 1 percent change in GDP led to 27.238 percent increase in indirect tax revenues while the coefficient of buoyancy indicates that 1 percent change in GDP led to on average, a 2.007 percent increase in indirect taxes revenue. This means that the growth in GDP was significantly successful in generating additional revenue that increase in tax rates. The study recommends that Government should either maintain or reduce the current levels of excise duty rates on excise supplies because any further increases will negatively impact on economic growth. The study further recommends that Government should prioritize policies that result into growth of the economy since the economy is the main driver of customs duties and VAT revenues. URA should be supported to improve efficiency in tax administration.