The Influence of Value Added Tax Revenue on Private Domestic Investment in Developing Countries

Authors

  • James Chindengwike St. John's University of Tanzania

DOI:

https://doi.org/10.1956/jge.v18i4.668

Keywords:

Value Added Tax, Tax Revenue, Private Domestic Investment, Tanzania

Abstract

The study's overarching goal is to assess the influence of Value Added Tax (VAT) revenue on private domestic investment in emerging countries. The study used a time series research design, and it is a case study of one country, Tanzania. Annual time series data from 1998 to 2020 were used in the study. The data on tax income (VAT) is taken from the Tanzania Revenue Authority website and the Bank of Tanzania, while the data on private domestic investment as Gross fixed capital formation of the private sector as a percentage of GDP is obtained from the World Bank. Following the first tests for heteroscedasticity, multi-collinearity, unit roots, lag length selection, and co-integrating vectors. The long-run and short-run correlations were then computed. The findings demonstrated that in the long run, value added tax is negatively associated to private domestic investment. The analysis showed a negative association between the degree of investment and the value added tax parameter estimates. Even though value added tax generates government revenue, increasing it encourages tax evasion and leads to high prices of goods, putting the burden on low-income earners, reducing disposable income and distorting saving and private domestic investment. The study recommends that governments reduce VAT rates, simplify their tax regimes, address any tax administrative issues, and plug all gaps for tax evasion in order to increase revenue generation and attract private investments. For example, the government should improve an appropriate tax system and implement progressive tax reforms to attract private investors. As the study's findings demonstrated that value added tax has a negative long-term impact on investment, a greater value added tax levied causes higher corporate costs. Governments must also lower VAT rates, simplify their tax regimes, address any tax administrative issues, and close any gaps for tax evasion in order to increase revenue generation and attract private investment. For example, the government should improve an appropriate tax system and implement progressive tax reforms to attract private investors. As the study's findings demonstrated that value added tax has a negative long-term impact on investment, a greater value added tax levied causes higher corporate costs.

References

Abinet, G. A. (2022). Determinants of Domestic Private Investment in West Gojjam zone ( the case of Finoteselam and Bure towns ). Journal of Emerging Technologies and Innovative Research (JETIR), Volume 9, Issue 7, 9(7), 769–789.

Adejare, A. T., & Owolabi, U. (2017). Empirical Analysis of the Effect of Taxation on Investment in Nigeria. International Journal in Commerce, IT & Social Sciences IT & Social Sciences (Impact Factor- 4.218, Vol.04 , Issue-08, (August, 2017), August 2017.

Adejare, T., & Akande, S. S. (2018). The Impact of Value Added Tax on Private Investment in Nigeria. August. https://doi.org/10.18535/afmj/v2i4.03 DOI: https://doi.org/10.18535/afmj/v2i4.03

Ahuja, H. L. (2010). Macroeconomics Theory and Policy: Advanced Analysis (Dr. Dilfraz Singh (ed.)). S. Chand Publisher.

Akinleye, G. T., Olarewaju, O. M., & Fajuyagbe, S. B. (2019). Assessing the effect of corporate Taxation on the Investment Policy of Manufacturing Firms in Nigeria. Folia Oeconomica Stetinensia, Volume 19 (2019) Issue 2, 19(2). DOI: https://doi.org/10.2478/foli-2019-0010

Alizadeh, M., & Motallabi, M. (2016). Studying the effect of value added tax on the size of current government and construction government. Procedia Economics and Finance, 36 ( 2016 ) 336 – 344, 36(16), 336–344. DOI: https://doi.org/10.1016/S2212-5671(16)30045-4

Andrejs, S., Valters, K., & Roberts, Š. (2019). Impact of changes in excise tax on the financial perfomance of alcoholic beverage manufacturing firms in Latvia. Journal of Financial Economics, 10(6), 23-30.

Arnold, J., & Schwellnus, C. (2008). Do Corporate Taxes Reduce Productivity and Investment at the Firm Level? Cross-Country Evidence from the Amadeus Dataset (No 2008-19).

Asogwa, F. O., & Okeke, N. M. (2013). Value Added Tax and Investment Growth in Nigeria. IOSR Journal Of Humanities And Social Science, Volume 18, Issue 1 (Nov. - Dec. 2013), PP 28-31, 18(1), 28–31. DOI: https://doi.org/10.9790/0837-1812831

Atawodi, O. W., & Ojeka, S. A. (2012). Factors That Affect Tax Compliance among Small and Medium Enterprises ( SMEs ) in North Central Nigeria. International Journal of Business and Management, Vol. 7, No. 12; June 2012, 87–96. DOI: https://doi.org/10.5539/ijbm.v7n12p87

Babatunde, O. A., Ibukun, A. O., & Oyeyemi, O. G. (2017). Taxation revenue and economic growth in Africa. Journal of Accounting and Taxation, Vol. 9(2),Pp. 11-22, February, 2017, 9(2), 11–22. DOI: https://doi.org/10.5897/JAT2016.0236

Babu, W. A., Pantaleo, I. M., & Ndanshau, M. O. A. (2020). Econometric Analysis of the Impact of Taxes on Private Investment in Sub-Sahara Africa. African Journal of Economic Review, Volume VIII, Issue I, January 2020, VIII(I).

Bakari, S. (2018). Munich Personal RePEc Archive If France continues this strategy , taxes will destroy domestic investment and economic growth. 89011.

Bevan, D. L. (2010). Fiscal Policy Issues for Tanzania. Emeritus Research Fellow in Economics, St John’s College, University of Oxford.

Bhatia, D. H. L. (2018). Public Finance and International Economics: Madhya Pradesh Bhoj (Open) University – Bhopal. Registrar, MP Bhoj (Open) University, Bhopal in 2020. https://doi.org/10.1787/g222033f2-en

Bhattacherjee, A. (2012). Social Science Research: Principles, Methods, and Practices (Second Edi). Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. http://scholarcommons.usf.edu/oa_textbooks/3

Bing, X., Lili, L., Liang, Y., & Mohib, U. R. (2019). Measuring Risk Allocation of Tax Burden for Small and Micro Enterprises. Www.Mdpi.Com/Journal/Sustainability, Sustainability 2019, 11, 741. DOI: https://doi.org/10.3390/su11030741

BOT. (2009). Bank of Tanzania: Annual Report 2008/2009; Ministry of Finance, Dar es salaam.: Vol. XLVII (Issue 3).

BOT. (2020). Bank of Tanzania Annual Report 2020/21: Minister of Finance and Planning, Government City – Mtumba. B ISSN 0067-3757

Caitlan, R., & Walbeek, C. Van. (2016). How does a change in the excise tax on beer impact beer retail prices in South Africa?? How does a change in the excise tax on beer (ERSA working paper 573; Issue January).

Chindengwike, J., & Kira, A. R. (2022). The Effect of Tax Rate on Taxpayers' Voluntary Compliance in Tanzania. Universal Journal of Accounting and Finance, 10(5), 889-896. DOI: https://doi.org/10.13189/ujaf.2022.100501

Chindengwike, J., & Tyagi, R. (2022). The Vector Auto Regressive Analysis identifying government expenditure policy impact on sustainable economic development. Journal of Global Economy, 18(2), 110-122. DOI: https://doi.org/10.1956/jge.v18i2.645

Chindengwike, J., Kira, A. R., & Mwambe, A. K. (2021). The Influence of CAMEL Ratios on Credit Rating Evaluation in Tanzanian Commercial Banks: An Empirical Analysis. Available at SSRN 3983414. DOI: https://doi.org/10.2139/ssrn.3983414

Chindengwike, J. (2022). The Influence of Electronic Tax Administration System on Taxpayers’ Voluntary Compliance in Tanzania. Available at SSRN 4068579. DOI: https://doi.org/10.2139/ssrn.4068579

Chindengwike, J. (2022). Does External Debts Promote Sustainable Economic Development in Developing Countries?. Available at SSRN 4031616. DOI: https://doi.org/10.2139/ssrn.4031616

Chindengwike, J., Kira, A. R., & Mkupaya, M. (2021). Effect of Psychological Factor on the Individual Investor’s Risk Tolerance at Listed Service and Manufacturing Companies in Tanzania. Available at SSRN 3983410. DOI: https://doi.org/10.2139/ssrn.3983410

Chindengwike, J., & Kira, A. R. (2021). The Relationship between Tax Transparency, Trust and Taxpayers’ Voluntary Compliance in Tanzania. Trust and Taxpayers’ Voluntary Compliance in Tanzania (December 27, 2021). DOI: https://doi.org/10.2139/ssrn.3994347

Chindengwike, J. (2022). The Effect of Foreign Direct Investment on Poverty Alleviation in East Africa Countries. Journal of Global Economy, 18(1), 53-66.

Chindengwike, J. (2022). The Effect of Foreign Direct Investment on Poverty Alleviation in East Africa Countries. Journal of Global Economy, 18(1), 53-66. DOI: https://doi.org/10.1956/jge.v18i1.634

Chindengwike, J., & Mnyampanda, A. M. (2021). Relationship between Asset Quality and Financial Performance of Commercial Banks Before and After Shifting Capital City Located to Dodoma Region, Tanzania. Tanzania (December 20, 2021). DOI: https://doi.org/10.2139/ssrn.3989888

Chindengwike, J. D. (2020). Factors influencing taxpayers’ voluntary compliance in Tanzania: a case of Dodoma region (Doctoral dissertation, The University of Dodoma).

Magese, E., & Chindengwike, J. (2021). The Perceptions on Usage of Electronic Fiscal Devices among Small Business Owners in Tanzania. International Journal of Multidisciplinary Research and Explorer (IJMRE) October-2021.

Chindengwike, J. (2022). The Effect of Recurring Expenditure Financed by External Grants on Promoting Sustainable Economic Development of Sub-Saharan Africa Countries. Journal of Global Economy, 18(3), 209-221. DOI: https://doi.org/10.1956/jge.v18i3.658

Chindengwike, J. (2021). Effect of Equity on Financial Performance among Small Business Firms in East Africa Countries.

Chindengwike, James Daniel, and Alex Reuben Kira. "The Impact of Foreign Debts on Economic Growth in Tanzania: Evidence from 1988-2020."

Chindengwike, J. (2022). The Contribution of Mobile Banking Informational Service On Customer Satisfaction in Tanzanian Commercial Banks. Journal of Global Economy, 18(3), 189-197. DOI: https://doi.org/10.1956/jge.v18i3.659

Chindengwike, J., Kira, A. R., & Manyanga, J. F. (2021). The Influence of Approved Budget on Promoting Outsourced Revenue Collection Performance of Local Government Authorities in Developing Countries. Available at SSRN 3989834. DOI: https://doi.org/10.2139/ssrn.3989834

Chindengwike, J. (2022). The Effect of Tax Compliance Cost on Taxpayer’s Voluntary Compliance in Tanzania. Available at SSRN 4115252. DOI: https://doi.org/10.2139/ssrn.4115252

Chenery, H. B. (2019). Overcapacity and the Acceleration Principle. Econometrica, Jan., 1952, Vol. 20, No. 1 (Jan., 1952), Pp. 1-28, 20(1), 1–28. DOI: https://doi.org/10.2307/1907804

Diamond, P. A., & Mirrlees, J. A. (1971). Optimal Taxation and Public Production. The American Economic Review, Mar., 1971, Vol. 61, No. 1 (Mar., 1971), Pp. 8-27, 61(1), 8–27. https://www.jstor.org/stable/1910538

Djankov, S., Ganser, T., McLiesh, C., Ramalho, R., & Shleifer, A. (2010). The effect of corporate taxes on investment and entrepreneurship. American Economic Journal: Macroeconomics 2 (July 2010): 31–64, 2(3), 31–64. DOI: https://doi.org/10.1257/mac.2.3.31

Ekpung, G., & Wilfred, W. (2014). The Impact of Taxation on Investment and Economic Development in Nigeria. Academic Journal of Interdisciplinary Studies Vol 3 No 4 July 201, 3(4), 209–218. https://doi.org/10.5901/ajis.2014.v3n4p209

Emmanuel, O. G., & Ajose, K. (2018). Domestic Investment and Economy Growth in Nigeria?: An Empirical Domestic Investment and Economy Growth in Nigeria. International Journal of Business and Social Science, Volume 9 • Number 2 • February 2018.

Epaphra, M., & Kaaya, L. E. (2020). Tax Revenue Effect of Sectoral Growth and Public Expenditure in Tanzania. Journal of Quantitative Finance and Economics. 2020, 2, 2.

Epaphra, M., & Massawe, J. (2017). Investment and Economic Growth: An Empirical Analysis for Tanzania. Turkish Economic Review Www.Kspjournals.Org, Volume 3 December 2016 Issue 4, December 2016. DOI: https://doi.org/10.20944/preprints201608.0159.v2

Erero, J. L. (2019). Impact of excise tax on the South African economyy: A dynamic CGE approach. Journal of Economics and Management, 37(3), 23-44, 37(3), 23–44. DOI: https://doi.org/10.22367/jem.2019.37.02

Ezejiofor, R. A., & Nwaolisa, F. (2015). Tax as a fiscal policy and manufacturing company’s performance as an engine for economic growth in nigeria. European Journal of Business, Economics and Accountancy, Vol.3 No.3, 2015, 3(3), 1–12.

Gujarati, D. (2004). Basic Econometrics (fourth edi). McGraw-Hill, New York.

Haseeb, H. (2021). Impact of direct taxes on private investments of pakistan (Issue August 2020). Kinnaird Collage for women.

Heale, R., & Twycross, A. (2015). Validity and reliability in quantitative studies. Evid Based Nurs, 18(3), 66–67., 18(3), 66–67. DOI: https://doi.org/10.1136/eb-2015-102129

Jackson, J. (2020). Assessment of Direct Taxation on Economic Growth in Tanzania. Institute of Accountancy Arusha.

Jeffrey M. Wooldridge. (2015). Econometric Analysis of Cross Section and Panel Data. In T. M. Press (Ed.), Humor (3rd ed., Vol. 16, Issue 4). Cambridge, Massachusetts. https://doi.org/10.1515/humr.2003.021

Juma, H. H. (2013). Challenges That Face Tariffs revenue Collection in zanzibar. The Open University of Tanzania.

Kelly, R., & Mavrotas, G. (2003). Savings and Financial Sector Development in Africa. In UNU World Institute for Development Economics Research, Discussion Paper: Vol. No. 2003/1 (Discussion Paper No. 2003/12 Savings; Issues E21, E44, C22).

Kilindo, A. A. L. (2015). Determinants of Private Investment in Tanzania: 1970-2015. Tanzanian Economic Review, Vol. 5 Nos. 1 & 2, 2015: 22–35, 93(30), 1. https://doi.org/10.5089/9781451844863.001 DOI: https://doi.org/10.56279/ter.v5i1-2.15

Kipilimba, T. F. (2018). Impact of Tax Administration Towards Government Revenue in Tanzania- Case of Dar-es Salaam Region. Vol. 7, No. 1, 2018, Pp. 13-21, 7(1), 13–21. https://doi.org/10.11648/j.ss.20180701.13 DOI: https://doi.org/10.11648/j.ss.20180701.13

Kuria, J. (2018). Effect of Custom Duty Incentives on the Perfomance of EPZ Firms in Kenya. International Journal of Finance (IJF), Vol.3, Issue 1, No.1, Pp 1 - 13, 2018, 3(1), 1–13. DOI: https://doi.org/10.47941/ijf.226

Levin, J. (2005). Taxation in Tanzania – Revenue performance and incidence: Country Economic Report 2005:4 , Örebro University, Swedish.

Liew, S. (2004). Which Lag Length Selection Criteria Should We Employ?? Economics Bulletin, Vol. 3, No. 33 Pp. 1?9, 3(33), 1–9.

Mackey, A., & Gass, S. M. (2005). Second language research Methodology and Design. Lawrence Erbaum Associates, Jersey, New.

Majeed, M. T., & Khan, S. (2008). The Determinants of Private Investment and the Relationship between Public and Private Investment in Pakistan. NUST Journal of Business and Economics, 1(1), 41–48. https://mpra.ub.uni-muenchen.de/49301/

Matlasedi, T. N. (2018). The influence of the real effective exchange rate and relative prices on South Africa ’ s import demand functionmand function. Cogent Economics & Finance, 5:1, 1419778, 17. DOI: https://doi.org/10.1080/23322039.2017.1419778

Mawia, M., & Nzomoi, J. (2013). An empirical investigation of tax buoyancy in Kenya. African Journal of Business Management, Vol. 7(40), Pp. 4233-4246, 28 October, 2013, 7(40), 4233–4246.

Michael, I. M., & Aikaeli, J. (2014). Determinants of Private Investment in Tanzania. African Journal of Economic Review, Volume 1I, Issue 2, July 2014, IX(Iv), 1–22.

Mndeme, R. K. (2015). Domestic Investment , Savings and Economic Growth in Tanzania?: A Dynamic Multivariate Analysis. Journal of Economics and Sustainable Development, Vol.6, No.14, 2015, 6(14), 56–69.

Mwakalobo, A. B. S. (2015). Revenue Generation Capacity in Developing Countries: Implications for Physical and Human Capital Development in Tanzania, Kenya and Uganda. African Journal of Economic Review, Volume III, Issue I, January 2015 Revenue, III(I), 21–38.

Mwamkonko, M. A. (2021). Does Public Expenditure Financing Mode Matter for Economic Growth in Tanzania? A Co-integration and Error Correction Modeling Approach. African Journal of Economic Review, Volume IX, Issue IV, September, 2021, IX(Iv), 126–147.

Njau, J. P. (2014). the United Republic of Tanzania Before and afterindependence.

Njuru, S. G., Ombuki, C., Wawire, N., & Susan Okeri. (2013). Taxation and private investment?: evidence for Kenya. International Journal of Economics and Management Sciences Vol. 2, No. 11, 2013, Pp. 78-93, 2(11), 78–93.

Nkem, H. U., & Sunday, A. A. (2019). Effect of Taxation on Domestic Investment in Nigeria. International Journal of Economics, Business and Management Studies, Vol. 6, No. 1, 96-104, 2019, 6(1), 96–104. DOI: https://doi.org/10.20448/802.61.96.104

Nkoro, E., & Uko, A. K. (2016). Autoregressive Distributed Lag (ARDL) cointegration technique?: application and interpretation. Journal of Statistical and Econometric Methods, Vol.5, No.4, 2016, 63-91, 5(4), 63–91.

Nyoni, T., & Bonga, W. G. (2019). An Empirical Analysis of the Determinants of Private Investment in Zimbabwe. Journal of Economics and Finance (DRJ-JEF), Volume 2 ~ Issue 4 (April, 2017) Pp: 38-54, 4(3), 257–266. DOI: https://doi.org/10.1108/REPS-12-2018-0043

Oloidi, G. . (2014). Company Income Tax and Investment Decisions?: A Behavioural Approach. IOSR Journal of Business and Management (IOSR-JBM), Volume 16, Issue 7. Ver. V (July. 2014), PP 11-19, 16(7), 11–19. DOI: https://doi.org/10.9790/487X-16751119

Omojolaibi, J. A., Okenesi, T.-N. P., & Ekundayo P. Mesagan. (2016). Fiscal Policy and Private Investment in Selected West African Countries. CBN Journal of Applied Statistics, Vol. 7 No. 1(b) (June, 2016), 147(1), 53–106.

Osoro, N. E. (2001). TAX REFORMS IN TANZANIA: MOTIVATIONS, DIRECTIONS AND IMPLICATIONS (Issue October) [University of Dar-es-Salaam]. %0AISBN 9966-900-41-1

Osoro, N., Mpango, P., & Mwinyimvua, H. (2001). An Analysis of Excise Taxation in Tanzania (African Economic Policy Discussion Paper Number 72; Issue 72).

Pfister, M. (2009). Taxation for Investment and Development?: An overview of policy challenges in Africa (Issue November).

Raza, S. A. and, Adeel, S., & Abassi, Z. (2012). Effect of Corporate Income Tax and Firms ’ Size on Investment?: Evidence by Karachi Stock Exchange (Issue 36800).

Robinson, D. O, G., & Papageorgious, M. (2014). Sustaining Long-Run Growth and Macroeconomic Stability in Low Income Countries - The Role of Structural Transformation and Diversification - Background Notes. Policy Papers, 2014(39). https://doi.org/10.5089/9781498343664.007 DOI: https://doi.org/10.5089/9781498343664.007

Seber, A., & Arslan, A. (2012). Strategical Behavior of Firms and Excise Tax Payment (Revenue Maximization, Profit Maximization, Love, Respect and Trust). International Journal of Economics and Finance, Vol. 4, No. 3; March 2012, 4(3), 164–169. DOI: https://doi.org/10.5539/ijef.v4n3p164

Sekaran, U., & Bougie, R. (2016). Research Method in Business: A Skill-Building Approach. In Wiley (Seventh Ed).

Senzu, T. (2019). The Empirical Evidence of Corporate Tax Impact on Private Investment of Developing Countries Using Ghana as a Case Study (MPRA Paper No. 92329; Issue 92329).

Suhendra, I., & Anwar, C. J. (2014). Determinants of Private Investment and The Effect on Economic Growth in Indonesia. GSTF Journal on Business Review (GBR) Vol. 3 No, June 2014, June. DOI: https://doi.org/10.7603/s40706-014-0028-4

Tavakol, M., & Dennick, R. (2011). Making sense of Cronbach ’ s alpha. Nternational Journal of Medical Education. 2011; 2:53-55, 53–55. https://doi.org/10.5116/ijme.4dfb.8dfd DOI: https://doi.org/10.5116/ijme.4dfb.8dfd

Tee, E., Boadi, L. A., & Opoku, R. T. (2016). The Effect of Tax Payment on the Performance of SMEs?: The Case of Selected SMEs in Ga West Municipal Assembly. European Journal of Business and Management, Vol.8, No.20, 2016, 119–125.

Temu, E. (2014). Factors Undermining Tax Reforms in Tanzania: A case of large taxpayers. Mzumbe University Dar es Salaam Campus College.

TIC. (2018). United Republic of Tanzania Ministry of Industry , Trade and Investment Tanzania Investment Centre. TIC Website, 1–8.

Tsehayu, G. T. (2020). The Effect of Tax Incentive on Domestic Investment in Ethiopia. Research Journal of Finance and Accounting, Vol.11, No.5, 2020, 11(5), 70–80.

URT. (2017). Ministry of Finance and Planning, Government Budget for The Financial Year 2017/2018, Citizens? Budget Edition.

URT. (2019). National Account Statistics of tanzania Mainland 2012 – 2018.

Vergara, R. (2004). Taxation and private investment?: evidence for Chile. Catholic University of Chile.

Yusuf, A., & Mohd, A. (2020). The Impact of Fiscal Policy Variables on Private Investment in Nigeria [Universiti Sains Malaysia]. https://doi.org/https://doi.org/10.21203/rs.3.rs-98376/v1 License: DOI: https://doi.org/10.21203/rs.3.rs-98376/v1

Downloads

Published

26.12.2022

How to Cite

Chindengwike, J. (2022) “The Influence of Value Added Tax Revenue on Private Domestic Investment in Developing Countries”, Journal of Global Economy, 18(4), pp. 289–310. doi: 10.1956/jge.v18i4.668.

Issue

Section

Articles