The Role of Value Added Tax (VAT) in the Economic Growth of Pakistan

Abstract

In Pakistan, General Sale Tax (GST) is essentially a Value Added Tax (VAT) and is an important source of revenue for balancing the government budgets. This study examines the extensive literature, concentrating on theory and empirical studies, on the relationship between VAT revenue and economic growth. It also evaluates critically the revenue performance of VAT in Pakistan during the period 1991-92 to 2011-12 with a larger focus on empirically estimating the role of VAT revenue in the economic growth (GDP) of Pakistan. Using Ordinary Least Square (OLS) Regression technique, the key outcome from this econometric study shows strong and positive impact of VAT revenue on the economic growth (GDP) of Pakistan. One per cent increase in the growth of net VAT revenue causes 0.24% increase in the growth of nominal GDP. The results of Granger Causality also confirm the existence of short run relationship between the growth of VAT revenue and economic growth (GDP) of Pakistan.

Key words: Value Added Tax, Economic Growth, Pakistan