Tax Gap Determinants in Pakistan

Abstract

This study discusses the factors affecting the revenue generation in Pakistan. Time series data is used from the period between 1996 to 2020. Total tax to GDP ratio is taken as dependent variable and agriculture and manufacturing sectors to define the tax base, inflation, per capita income and trade openness as economic variables. Corruption and government effectiveness are taken as social variables. ADF and ARDL techniques were applied in this study and bound test and long-run cointegration were measured among variables. Results reflect strong nexus among all economic variables with tax revenue in short-run. Tax base is also highly significant with tax collection. Only corruption appears insignificant in short-run. In long- run only corruption and inflation show insignificant relationship with total tax to GDP ratio. Findings suggests that government should take measures to increase the tax base and improve the tax system that is itself a hurdle in tax compliance.