Professional Documents
Culture Documents
Introduction .................................................................................................................................................. 3
Problem Statement ....................................................................................................................................... 3
Objective of the Study .................................................................................................................................. 4
Research Methodology ................................................................................................................................. 4
Literature Review .......................................................................................................................................... 4
Role of Taxation in developing countries like India Pakistan........................................................................ 5
Resource Mobilization .............................................................................................................................. 6
Reduction in inequalities of income ......................................................................................................... 6
Foreign Exchange ...................................................................................................................................... 6
Dependent Variable ...................................................................................................................................... 6
Independent Variable ................................................................................................................................... 6
Tax Revenue .................................................................................................................................................. 7
Explanation of Independent Variables.......................................................................................................... 7
Adjusted National Income per Capita ....................................................................................................... 7
GDP Growth .............................................................................................................................................. 8
Tax Less subsidies...................................................................................................................................... 8
Regression Analysis ....................................................................................................................................... 9
Regression Model Explanation ................................................................................................................... 10
Residual Statistics.................................................................................................................................... 10
Correlations................................................................................................................................................. 11
Explanation: ............................................................................................................................................ 12
Regression Equation ................................................................................................................................... 13
In case of Pakistan .............................................................................................................................. 13
In case of India .................................................................................................................................... 13
Constant: ................................................................................................................................................. 13
Parameter Interpretation ........................................................................................................................... 13
LGDP ........................................................................................................................................................ 13
Pakistan ............................................................................................................................................... 13
India .................................................................................................................................................... 13
LTLS ......................................................................................................................................................... 13
Pakistan ............................................................................................................................................... 13
India .................................................................................................................................................... 13
LANI ......................................................................................................................................................... 14
Pakistan ............................................................................................................................................... 14
India .................................................................................................................................................... 14
Least Square ............................................................................................................................................ 14
Pakistan ............................................................................................................................................... 14
India .................................................................................................................................................... 14
Anova ...................................................................................................................................................... 15
Pakistan ............................................................................................................................................... 15
India .................................................................................................................................................... 16
Coefficients ............................................................................................................................................. 16
Pakistan ............................................................................................................................................... 16
India .................................................................................................................................................... 17
Conclusion ................................................................................................................................................... 17
Recommendations ...................................................................................................................................... 18
References .................................................................................................................................................. 19
Introduction
Tax is more than just a source of revenue and growth. It plays a key role in building up
institutions, markets and democracy through making the state accountable to its taxpayers. Just
as excessive tax burdens might hinder growth in wealthier countries, in developing economies a
lack of tax structures is a major cause of weak, unresponsive governance. It also leads to an
overreliance on aid. With tax, the public can hold governments to account for their decisions, and
because tax revenues are relatively predictable, governments can plan ahead with greater
certainty.
The developing countries need aid for their growth in the various sectors of economy they can
improve their tax structure and tax collection, increase their autonomy and reduce their long time
assistance on external assistance. (Owens, 2018)
Taxes are mandatory payments, ruled by laws. Tax revenue is collected from the whole society
with differentiated intensity, inspired by considerations of justice, efficiency and effectiveness.
In particular, the tax system can have the broad goal of reducing income inequality.
In today’s world taxation is used as an instrument of economic policy. It affects the total volume
of production, consumption, investment, choice of industrial location and techniques, balance of
payments and distribution of income.
The following are the objectives of taxation in modern public finance. (Muley, n.d.)
1. Economic development
2. Price stability
3. Control of Cyclical Fluctuations
4. Reduction of BOP Difficulties
5. Non-Revenue Objective
In this report the tax revenue of two South Asian countries (India & Pakistan) is being discussed
and what difficulties these two developing countries are facing regarding tax collection and what
impact their tax revenue is generating on other economic indicators.
Problem Statement
Referring to the article of “The Express Tribune” dated 10th July 2017, the article talks about the
failed tax system of Pakistan.
Referring to the article of “The Times of India” dated 30th December 2016, the article talks about
the problems of the tax structure and administration in India.
In this paper, we study the effect of economic, structural (productive specialization), social and
institutional factors on tax revenue through static and dynamic panel data techniques and we also
comment on the role of lagged values of the dependent variable. Both tax gap and tax effort are
calculated so as to analyze how they evolve across countries and over time
Research Methodology
The methodology used in this project is based on quantitative data. For purpose of regression we
have taken total of 31 observations of India and Pakistan. Nature of data used in this study is
time series. Least Square is used as to validate the data, which is interpreted as goodness of fit
test of variables. Dependent variable is Tax Revenue and the independent variables are Adjusted
National income per capita, GDP growth and tax less subsidies. We have derived the impact of
independent variables on dependent variables by the use of running Multiple Regression. Data
used is validated through correlation and normality test.
Literature Review
(Carnahan, n .d.) States that a well-functioning revenue system is a necessary condition for
strong, sustained and inclusive economic development. Revenue funds the public expenditure on
physical, social and administrative infrastructure that enables businesses to start or expand. The
revenue system is also a central element in supporting a strong citizen–state relationship that
underpins effective, accountable and stable governments.
India and Pakistan has huge challenges, challenges related to poverty elimination, large
unemployment, and lack of resources and providing basic facilities like education, health and
safety to its citizens. These challenges can be meet by increasing tax revenue which will generate
more funds for the development projects and this will create a better relation between the people
and the government.
(Bahl and Bird, 2008) believes that the problem in developing countries like India and Pakistan is
that there is a huge difference between revenue and expenditure which creates a large fiscal
deficit which in turn creates economic problems for the country which are very hard to face.
This gap is created because of the lapses in the tax structure and the failure of the government in
collecting taxes from the public. Government should be transparent and should be assuring the
public that the taxes being collected from them is being spend on their development and the
government is taking all possible steps to make sure that the taxpayer money is being returned to
him in the form of development projects and other welfare projects.
The multitier governments work best when taxes and the benefits of public spending are as
closely related as possible. When those residing in a particular political jurisdiction both pay for
what they get from the public sector and get what they pay for that is, benefit from the
expenditures financed by the taxes they pay.
This report will be discussing the problems of the two South Asian countries and the lapses in
their tax structure and how they can increase their tax revenue. The report will be highlighting
the need to collect taxes from the public and how the collect taxes should be benefitting the
overall population of the country. The purpose of this report is to study the tax structure and
checking the factors that are effecting the tax revenue and how these factors can be eliminated
and to compare the tax revenue of the two countries and what major differences are there in the
tax structure and how the decrease in tax revenue is effecting the growth.
This report analyzes the effect of Tax revenue on the economic activities in India and Pakistan.
Tax revenue is examined through Adjusted National Income per Capita, GDP Growth and Tax
less subsidiaries.
Fiscal policy or budget has become important instrument in promoting growth and development
in such economies. Taxation is an important part of fiscal policy which can be effectively used
by governments of developing countries.
The tax revenue is generated by imposing direct tax such as personal tax and corporate tax and
indirect tax such as customs duty and excise duty.
In 2016-17 it is estimated that the tax revenue of India was 17.10 lakh crore. The direct taxes
were estimated around 8.47 lakh crore while the indirect taxes were 8.63 lakh crore (NEWS and
News, 2017)
The estimated tax revenue of Pakistan in 2016-17 was 3,367,874 Million Rupees. The direct
taxes were estimated around 1,344,226 Million Rupees while in indirect taxes were 2,023,648
Million Rupees (as reported by Federal Board of Revenue Pakistan)
Taxation follows the principle of equity. The direct taxes are progressive in nature. Also certain
indirect taxes, such as taxes on luxury goods are also progressive in nature Also certain indirect
taxes, such as taxes on luxury goods are also progressive in nature. This means the rich class has
to bear the higher incidence of taxes, whereas, the lower income group is either exempted from
tax (direct taxes) or has to pay lower rate of duty (indirect taxes) on goods consumed by the
masses. Thus, taxation helps to reduce inequalities of income and wealth.
Foreign Exchange
Taxation encourages exports and restricts imports. Generally, developing countries and even the
developed countries do not impose taxes on export items.
Dependent Variable
Tax Revenue
Independent Variable
Adjusted National Income per Capita
GDP Growth
Tax Less subsidies
Explanation of the Dependent Variable
Tax Revenue
Tax revenue is defined as the revenues collected from taxes on income and profits, social
security contributions, taxes levied on goods and services, payroll taxes, taxes on the ownership
and transfer of property, and other taxes. Total tax revenue as a percentage of GDP indicates the
share of a country's output that is collected by the government through taxes. It can be regarded
as one measure of the degree to which the government controls the economy's resources.
The “Tax Revenue” has been selected as the dependent variable because it has effects on many
economic indicators of the country , the tax revenue gives a very clear picture about the tax
structure of the country and the type of taxes imposed in that country. The tax revenue collection
can hint about the economic progress of the country in the future.
The tax collection is a major problem in the two countries as people don’t want to pay taxes and
file their tax returns and the governments fails to increase the tax base. The number of income
tax return filers stood at only 580,000 till October 31, 2017. In Pakistan, 4.3 million people
are registered National Tax Number (NTN) holders and the FBR could not do anything about
those people who are not filing the returns. (Rana, 2017)
The same problem is in India, the number of tax filers are very low as compared to the large
population, this creates fiscal deficit resulting in economic problems for the country.
It is the adjusted net national income divided by number of people in the country. It is the gross
national income minus consumption of fixed capital and natural resources depletion.
National income can be explained as the total value of a country’s final output of all new goods
and services produced in one year. The total amount of income accruing to a country from
economic activities in a year’s time is known as national income. It includes payments made to
all resources in the form of wages, interest, rent and profits.
The ADNIPC can vary depending upon the tax revenue the country is generating, the more
resources the government have the more business activities there will be in that country, the
more industrial and agricultural development will take place in that country as India and Pakistan
mostly export agricultural products so the population will want the government to invest in
agriculture more which will increase the national income of the country.
GDP Growth
The GDP growth rate measures how fast the economy is growing. It does this by comparing one
quarter of the country's gross domestic product to the previous quarter. GDP measures the
economic output of a nation.
The GDP growth rate is driven by the four components of GDP. The main driver of GDP growth
is personal consumption. This includes the critical sector of retail sales. The second component is
business investment, including construction and inventory levels. Government spending is the
third driver of growth. Its largest categories are Social Security benefits, defense spending and
Medicare benefits. Fourth is net trade.
India’s GDP is the 06th largest in the world but still the living condition of the majority of the
Indians is poor and the governments fails to provide resources for the betterment of their people
the reason is that the government don’t get enough taxes from the people resulting in lack of
resources and financial capital for the population. (CHAKRABARTI, 2018)
The GDP growth of Pakistan is 5.7% in 2017 and that of India is 6.6%
Considering the potential and the natural resources both countries possess the economic growth
can increase if the government has resources to invest in the people.
A subsidy is a benefit given by the government to groups or individuals, usually in the form of a
cash payment or a tax reduction. While a tax drives a wedge that increases the price consumers
have to pay and decreases the price producers receive, a subsidy does the opposite. A subsidy is
a benefit given by the government to groups or individuals, usually in the form of a cash
payment or a tax reduction. A subsidy is often given to remove some type of burden, and it is
often considered to be in the overall interest of the public. In economic terms, a subsidy drives a
wedge, decreasing the price consumers pay and increasing the price producers receive, with the
government incurring an expense.
The government of India provides subsidies to the people more than a fifth of the population is
below the official poverty limit, it is given for a variety of reasons, and in a variety of sectors.
Regression Analysis
Regression is one of many ways to let us know about how the variables are reacting and
impacting given the data. Following will be the analysis of our study totally based on regression,
correlation, least square and normality test.
Interpretation of Coefficient is crucial as it signifies the impact of variables.
Residual Statistics
N LTR 31 31 31 31
LGDP 31 31 31 31
LTLS 31 31 31 31
LANI 31 31 31 31
Correlations in case of India
N LTR 31 31 31 31
LANI 31 31 31 31
LGDP 31 31 31 31
LTLS 31 31 31 31
Explanation:
Correlation is defined as the linear association of variables that exists among variables. This
means that variables having correlation can’t determine the true impact on dependent variable.
Here in our data if we look at the correlation below the diagonal of 1, the correlation coefficient
can range in value from −1 to +1. The larger the absolute value of the coefficient, the stronger
the relationship between the variables.
For the Pearson correlation, an absolute value of 1 indicates a perfect linear relationship. A
correlation close to 0 indicates no linear relationship between the variables. By this we can say
that no correlation exists and if it does, the impact is too much minimal as it is close to 0 and in
aforementioned table of correlation no doubt the variables can be seen close to 1 but their
significance of correlation is as lower as close to 0.
Regression Equation
In case of Pakistan
Ý=ά + β’X(LGDP) + β’X(LTLS) - Β’X(LANI)
Ý= -6.064 - 0.595LGDP+1.19LTLS + 1.826LANI
In case of India
Ý=ά + β’X(LGDP) + β’X(LTLS) - Β’X(LANI)
Ý= -17.727 - 0.061LGDP + 1.997LTLS + .452LANI
Constant:
Ý= -6.064 means that keeping all variable constant, Tax Revenue index will be -
6.064. (Pakistan)
Ý= -17.727 means that keeping all variable constant, Tax Revenue index will be -
17.727 0. (India)
Parameter Interpretation
LGDP
Pakistan
Ý= -6.064 - 0.595LGDP, keeping all the variables constant, if GDP growth of Pakistan increases
by 1 unit, tax revenue will decrease by 0.595.
India
Ý= -17.727 - 0.061LGDP, keeping all the variables constant, if GDP growth of Pakistan
increases by 1 unit, tax revenue will decrease by 0.061.
LTLS
Pakistan
Ý= -6.064 +1.19LTLS, keeping all the variables constant, if tax less subsidies of Pakistan
increases by 1 unit, tax revenue will increase by 1.19. Theoretically,
India
Ý= -17.727+1.997LTLS, keeping all the variables constant, if tax less subsidies of Pakistan
increases by 1 unit, tax revenue will increase by 1.997.
LANI
Pakistan
Ý= -6.064 + 1.826LANI, keeping all the variables constant, if tax revenue of Pakistan increases by
1 unit, national income per capita will increase by 1.826.
India
Ý= -17.727+0.452LANI, keeping all the variables constant, if national income per capita of
Pakistan increases by 1 unit, tax revenue will increase by 0.452.
Least Square
Pakistan
Model Summaryb
Change Statistics
Model Summaryb
Change Statistics
1 27 .000
India
Model Summaryb
Change Statistics
Change Statistics
1 35 .000
Anova
Pakistan
ANOVAa
Total 16.262 30
As mentioned below the F calculated is 179.347 which is greater than around 50, this means we
have significant results. This means we would reject that the impact of above explained,
independent variables is equal to 0.
The significance of result is very important as it give the interpretation of results being
significant and truly defined impact on tax revenue index and hence it validate the alternative
hypothesis.
India
ANOVAa
Total 16.197 38
As mentioned below the F calculated is 1501.335, which is greater than around 50, this means
we have significant results. This means we would reject that the impact of above explained,
independent variables is equal to 0.
The significance of result is very important as it give the interpretation of results being
significant and truly defined impact on tax revenue index and hence it validate the alternative
hypothesis.
Coefficients
Pakistan
Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
Standardized
Unstandardized Coefficients Coefficients
Conclusion
The dependent variable selected has its impact on the independent variables and this can be
stated after performing the analysis of regression, Annova and Pearson Correlation. The tax
structure of both the countries showed similarities as there was same problems in the tax system
of the countries. The problem that both countries face is that of tax collection, both have a very
less proportion of Tax fillers compared to the overall population. In recent years the number of
fillers increased in India because of the government crackdown on black money according to
India’s latest economic survey, 10.1m people filed income tax returns for the first time between
November 2016 and November 2017, compared with an average of 6.2m in the preceding six
years.
The government failure in correcting the tax structure and reducing the gap between the revenue
and expenditure results in less development spending and this stops the economic development,
if government makes sure that the taxpayer money is being spend on the development of the
country and satisfies the taxpayer will get benefit from the taxes that are being paid to the
government this creates a very good opportunity to increase the tax base of the country.
There are certain expenses the government has no choice in paying each year. This mandatory
spending means that certain programs and services the federal government supports cannot
survive without annual tax revenue. This type of spending accounts for approximately two-thirds
of all revenue the government collects through taxes. Some of the largest recipients of these
funds are health-care programs, the military, creditors of the government, since it is mandatory
for the government to make these payments the government needs tax revenue and greater the
tax revenue that will be collected the more it will be spend on development projects.
Recommendations
The following are the recommendations to improve the tax structure and to increase the tax revenue.
Bahl, R. and Bird, R. (2008). Subnational Taxes in Developing Countries: The Way
Forward. Public Budgeting and Finance.
Rana, S. (2017). Number of income tax return filers drops to less than half | The Express
Tribune. [online] The Express Tribune. Available at: https://tribune.com.pk/story/1546446/2-
number-income-tax-return-filers-drops-less-half/ [Accessed 9 Dec. 2018].
CHAKRABARTI, S. (2018). View: Being the world’s 6th-largest economy means little for
India’s future. [online] The Economic Times. Available at:
https://economictimes.indiatimes.com/news/economy/indicators/view-being-the-worlds-6th-
largest-economy-means-little-for-indias-future/articleshow/64966415.cms