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Value Added Tax (Vat), Gross Domestic Production (Gdp) and Budget Deficit (Bd): a Case Study in Sri Lanka

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Value Added Tax (Vat), Gross Domestic Production (Gdp) and Budget Deficit (Bd): a Case Study in Sri Lanka Proceeding of International Conference on Contemporary Management - 2015 (ICCM-2015), pp 01-11 VALUE ADDED TAX (VAT), GROSS DOMESTIC PRODUCTION (GDP) AND BUDGET DEFICIT (BD): A CASE STUDY IN SRI LANKA. Anojan,V ABSTRACT The focus of this study is to find out the impact of Value Added Tax (VAT) on Gross Domestic Production (GDP) and Budget Deficit (BD) of the country and also identify the association among value added tax, gross domestic production and budget deficit in Sri Lanka. Every country needs adequate tax revenue for their successful economic activities of their country. The tax revenue can be divided into two major categories such as direct and indirect tax revenue. Imposing the tax revenue is directly link with gross domestic production and budget deficit of the country. The indirect taxes generally impose on production, turnover, distribution of goods and services so indirect taxes directly link with gross domestic production of the country. Value added tax is one of the major indirect tax revenue of the Sri Lanka which was introduced in 2002 (Central Bank Report). Regression and correlation analysis were performed in this study with the help of SPSS latest version. Regression results confirmed that there is (R2 = 0.866) significant impact of value added tax on gross domestic production of the country and also there is (R2 = 0.705) significant impact of value added tax on budget deficit. Correlation results confirmed that there is (P = 0.000) significant association between value added tax and gross domestic production and also there is (P = 0.002) significant association between value added tax and budget deficit of the country. It implies that the Sri Lankan Government should give key focus on amending and implementation of VAT because the county is facing the budget deficit continuously and here the gross domestic production impact by VAT same time VAT impact on BD of the country. Also the high level of GDP needs for every country to improve the BD of the country so the government has to handle the value added tax very carefully for the economic success of the country. Keywords: Budget Deficit, Gross Domestic Production, Sri Lanka and Value Added Tax, Department of Accounting, Faculty of Management Studies and Commerce, University of Jaffna, Sri Lanka. [email protected] 01 1. INTRODUCTION Government revenue generally can be divided in to two major categories such as divided in to two major revenues such as tax direct tax revenue and indirect tax revenue. revenue and non-tax revenue. Tax revenue Tax revenue contributes more than 85% to plays an important role in the tax revenue of total revenue of the country. More than 80% the country especially more than 85% of tax revenue comes from indirect tax revenue of the country comes from the tax revenue and the remaining part contributes revenue in Sri Lanka. This study covers by the direct tax revenue. Here the Value value added tax, gross domestic production Added Tax (VAT) is one of the major tax and budget deficit of the country. Value under the direct tax revenue as well as added tax is one of indirect tax in Sri Lanka Income Tax (IT) is the major tax under direct which was introduced in 2nd August 2002, tax revenue of the country. Singh (1999), due to this purpose goods and service tax Shanmugam (2003), Lymer and Oats (2009) abolished on the same date. pointed in their study that the main objective of imposing certain taxes on the public is to Taxation is one of the important generate revenues for the government for elements in managing national income, public expenditure. However Lymer and especially in developed countries tax Oats (2009) suggested, taxes are needed to revenue is playing an important role in reduce inequalities through a policy of civilized societies since their birth thousands redistribution of income and wealth so that years ago (Lymer and Oats, 2009). income gap between the rich and the poor is not as significant. Lymer and Oats (2009) stated that tax is defined as a compulsory levy or payment, Tax systems are also designed for social imposed by government or other tax raising purposes, such as discouraging certain body on income, expenditure, or capital activities which are considered undesirable assets, for which the taxpayer receives and protecting the environment. For nothing specific in return. However tax instance, the excise taxes on alcohol and payers are enjoying some advantages as tobacco are (at least partly) exercised to indirectly such as free health, free education, decrease consumption and thus encourage a nation defense, infrastructure facilities, healthier lifestyle. Taxes are also expected to etc… Income tax was introduced very firstly ensure economic goals through the ability of in England (UK) in 1799. In Sri Lanka the taxation system to influence the income tax was introduced under colonial allocation of resources including system in 1932. The first year of assessment transferring resources from the private (Y/A) was started from 1931. 1931/1932 is sector to the government to finance the the first year of assessment in Sri Lankan tax public investment programme, the direction system. Sri Lankan tax revenue can be of private investment into desired channels 02 through such measures as regulation of tax Research Questions rates and the granting of tax incentives. In RQ1: Does VAT impact on GDP of the addition, import duties could be used to Sri Lanka? protect local industries from foreign RQ : Does VAT impact on BD of the competition. This has the effect of 2 Sri Lanka? transferring a certain amount of demand RQ : Is there any association among VAT, from imported goods to domestically 3 produced goods. Sri Lankan government is GDP and BD of the Sri Lanka? often doing varies changes in value added tax policy in the budgets according to the 3. SIGNIFICANCE OF THE STUDY economic needs of the country. Especially This research attempted to evaluate and government announced value added tax' analyze the impact of VAT on GDP and BD. registration threshold as 15 million LKR Every government has to increase turnover or production from 1st January 2015 government revenue and try to reduce and the government has reduced value added unnecessary government's expenses to tax rate to 11% as well. reduce the budget deficit here tax revenue plays a vital role in government revenue. 2. STATEMENT OF THE PROBLEM Specially value added tax contributes very highly to tax revenue. Further the There is a problem in Sri Lanka which government can be able to reduce the budget is, Sri Lanka is facing the budget deficit deficit through increasing gross domestic continuously also the government is doing production of the country. Even though several actions to reduce the budget deficit value added tax directly imposing through increasing tax revenue, increasing production of the goods and services and gross domestic production of the country turnover so government has to consider however they are unable to reduce the budget when they imposing value added tax on deficit. Sri Lanka had budget deficit 488,967 productions and turnover to manage the million LKR as well tax revenue 845,297 value added tax revenue and gross domestic million LKR (Central Bank Report 2012) in production of the country because both are 2012. Here proportion of the tax revenue and key important elements in economic budget deficit is 1:0.578, it is not good shine position of the country. for any country and especially to Sri Lanka because it is one of the developing country. The government has to take necessary steps 4. RESEARCH OBJECTIVES to improve gross domestic production and The main objective of the research was, tax revenue of the country to reduce the to find out the impact of value added tax on budget deficit of Sri Lanka. gross domestic production of Sri Lanka, the following objectives were considered as sub objectives. 03 To reveal the impact of value added tax scope for raising extra tax revenues, as a on budget deficit of the country. result of Non-compliance with corporate To find out the relationship between persons result from technicalities and tax value added tax, gross domestic avoidance, poor record keeping and cash production and budget deficit of Sri transactions. Keen and Mansour (2010) Lanka. pointed that in analyzing the revenue To suggest the possible recommen mobilization in sub-Saharan-Africa seen - dations to government of Sri that, within sub- Saharan Africa, revenue Lanka. performed more strongly in resource-rich countries. Desai, Foley and Hines (2004) 5. SCOPE OF THE RESEARCH noted that governments have at their disposal The researcher considered value added many tax instruments that could be used to tax revenue, gross domestic production and finance their activities such as recurrent and budget deficit of the Sri Lanka. The research capital expenditure. These tax alternatives aims to analyze and find out impact of value include changes in tax policy by the way of added tax revenue and its impact on gross changes in personal and corporate income domestic production and budget deficit of taxes, taxes on sales and services as well as Sri Lanka. The past ten years central bank manufacturing, value added taxes, capital reports (CBR) from 2004 to 2013 of the Sri gain taxes and others. It is not uncommon for Lanka used in this research to collect a country to impose all of these taxes evenly. necessary data for the study. Lim (1983) in this study of instability of government revenue and expenditure in less 6. LITERATURE REVIEW developed countries observed that tax There are very few studies which have revenues instability was the major cause of been conducted in the field of taxation expenditure instability in less developed however there are some of the relevant countries in the period going from 1965 to related studies with regard to the subject 1973.
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