The role of value added tax in the economic growth of Pakistan

No public policy issue is as important as the structure and level of taxes. In Pakistan, income tax, value added tax (VAT) and trade tax (custom duty) are major sources of tax revenues for balancing government budgets. Nevertheless, VAT is a leading source of tax revenues over the past 15 years. In this paper, an attempt is made to find answer if the empirical evidence exists between VAT revenue growth and economic growth proxy by nominal GDP. Using ordinary least square regression technique, the key outcome from this econometric study is that VAT revenue growth has strong and positive impact on economic growth in Pakistan during the period 1991-1992 to 2011-2012. One percent VAT revenue growth causes 0.24% economic growth. The results of Granger causality test also corroborate the empirical evidence between VAT revenue growth and economic growth during the period under review. Additionally, there is no empirical evidence found between income tax revenue growth and economic growth as well as trade tax revenue growth (custom duty) and economic growth.