Abstract:
The relationship between economic growth and tax revenues is a debating issue
among the researchers for a long period. The fiscal policy plays a significant role
in economic growth in every country. Fiscal deficit is a chronic problem for many
countries including Sri Lanka. This paper investigates the impact of direct tax
revenue and indirect tax revenue on economic growth of Sri Lanka by using time
series data for the period of 1990-2017. Growth of RGDP is taken as dependent
variable while direct and indirect tax revenue, gross capital formation and human
capital as independent variables. After checking the stationary of the variables
(through ADF test), Autoregressive Distributive Lag (ARDL) approach to co integration is used to find association among variables. In the long term analysis,
a relationship between indirect tax revenue with economic growth has a negative
relationship. But Direct tax revenue statistically insignificant in long run and short
run. Further, human capital is negatively correlated to economic growth in the long
run and short run while gross capital formation positively affects the economic
growth. Diagnostic tests confirm that our model is free from hetroskedasticity
and autocorrelation with satisfactory functional form. The CUSUM show that
model is structurally stable. Thus, the policy makers should reform the tax policy
in order to promote the economic prosperity of the country as well as the fiscal
consolidation since currently contribution of indirect taxes outweigh (20% of total)
the direct taxes (80% of total).
