Abstract:
Currently the concept of the shadow economy is the most talking issue. World bank
and IMFdo lot of researches to measure the domination of shadow economy all
over the world and issue varies reports based on it. Not only that, every country also
gives important to measure the size and impact of shadow economy on the official
economy. That is why this studyanalyses the impact of the shadow economy on
the official economy in Sri Lanka.For this Study, Time series data were collected
between 1990 and 2017, and multiple regression was used to find out the relationship
and ordinary least squares technique was used to estimate the Multiple regression
model. Finding of this study emphasizes that the shadow economy has negative
and significant impact on the official economy in Sri Lanka. The coefficient of the
shadow economy is – 0.13it meansif the size of the shadow economy decreases
by 1 percent, the official economy will increase by 0.13 percent. And alsocapital
has a positive and significant impact on the official economy whereas labour force
has a negative and significant impact on the official economy. It was therefore
recommended that the government should take following measuressuch as reducing
high tax rate, Simplifying the tax system and making it easy to understand by the
public, Taking legal action against the people who are tax evasion, Reducing the
social welfare payment, Receiving state revenue from other sources rather than
tax sources and People need to be educated about the purpose of the taxation and
obligationto control the shadow economy.
