Impact of Trade Liberalization on Tax Revenue of SAARC Member Countries

Abstract

The aim of present research is to empirically investigate the impact of trade liberalization on aggregate tax revenue and components of aggregate tax revenue such as international trade tax revenue, income, profit and capital gains tax revenue, and domestic goods and services tax revenue of SAARC countries over the time period of 2000-2016 based on the argument that trade liberalization decrease international trade tax revenue, consequently total tax revenue declined. Fixed effects model has been applied for empirical investigation. Empirical findings revealed that trade liberalization strongly linked with total tax revenue and its components. Results indicate that higher trade liberalization in SAARC countries increase the share of domestic goods and service tax revenue and income, profit and capital gains tax revenue. However the contribution of international trade tax revenue declined in aggregate tax revenue. External debt servicing is not strongly associates with aggregate tax revenue and tax revenue collected from international however, strongly associated with domestic tax revenue. Corruption perception index has a positive and significant impact on aggregate tax revenue and domestic tax revenue. While the other variables such as, exchange rate, agriculture and service have positive and significant impact on aggregate tax revenue. Per capita GDP indicates the negative link with total tax revenue. Findings suggest that government needs to adopt adequate tax revenue policy and widen the tax base to improve tax revenue. Key Words: Trade liberalization, Tax revenue, CPI index, SAARC countries.