The Differential Impact of Individual Components of Direct and Indirect Taxes on Economic Growth of Pakistan

Abstract

Pakistan’s economy is facing a grim challenge of fiscal deficit that is characterized by widening gap between government’s tax revenue and expenditures. Taxation and economic growth have a complex relationship that has been debated among scholars. The research gap identified is that there is inconclusive evidence with respect to the differential impact of components of direct and indirect taxes on Pakistan’s GDP growth. The purpose of the study is to investigate the impact of Direct Taxes, and Indirect Taxes including Sales Tax, Custom Duty and Excise Duty on the economic growth of Pakistan. The study has tested test three hypothesis and estimation strategy is based upon Unit Root Tests and ARDL Analysis. The study has used data from State Bank of Pakistan consisting of 20 years of monthly tax revenue collection from January 2001 to June 2022. The estimation strategy used for this study includes standard time series techniques such as Unit Root test encompassing both the Phillips-Perron (PP) and Augmented Dickey-Fuller (ADF) tests, and ARDL. The results of the study indicate that there is an insignificant relationship between tax structure and GDP growth rate of Pakistan. The reasons for this insignificant relationship include highly significant impact of some of the control variables, and many other factors beyond the tax structure of Pakistan.