Prepared by the researcher : Arwa Osama Adly , Mahmoud Gamal Mohamed , Noura Omar Esmail  , Sophie Amged Mossad , Yussef Ayman Mohamed Dokdok – Supervisor : Dr. Ali Mohamed Ali

Democratic Arab Center

The study provided insight into the value-added tax as a method of raising revenue in Egypt and how it impacts that revenue while also considering other factors including inflation, gross domestic product, gross fixed capital formation (investment), and public debt. This study used the ARDL and ECM models to show the long-term and short-term effects and determine the degree of the influence of value-added tax on Egyptian state revenues. It concluded that the value-added tax had a negative impact on Egyptian public revenues both immediately and over the long term, with an error correction term value of -0.441234. Egypt exempts some small businesses whose sales of goods and services are less than 500 thousand pounds, some retailers from value-added tax, some service providers whose outputs are difficult to price, and some retailers from value-added tax, which reduces the taxable segment and raises the tax burden on others.

1-  Introduction

Every country works to improve its economic situation, improve the level of well-being of citizens, and work to increase its revenue inputs in order to have an economic force that helps it keep pace with developed countries. For this, when talking about economic strength, the need arose to talk about the general revenues of the state, and to talk in particular about the mechanisms of collecting these revenues because they are one of the pillars of the state budget in addition to the expenditures.

When talking about the mechanisms and methods of collecting taxes, they come at the forefront of the forms of revenues in Egypt, which are taxes because it affecting on the lives of citizens and also enter the path of investment within the state and have a clear connection to the situation in the Egyptian economy. So the term tax is defined as “confined to compulsory, unrequited payments to general government” & also it is “a monetary amount or mandatory fee imposed by the state on individuals and companies, with the aim of financing the expenditures that the state must commit to provide social services”. There are many types of taxes such as direct taxes (property tax, corporate tax, individual tax) & indirect taxes (general sales tax, value added tax, custom duty tax, stamp duty tax).

The study shed light on the state’s strategy in the tax sector, which is the value- added tax that was approved in Egypt, in an attempt to find out the impact of value- added tax on revenues, in addition to the impact of some factors that affect revenues such as investment, inflation, and gross domestic product, from 1990 to 2020 to find out the extent of the change before and after the application of value-added tax on Egyptian public revenues.

This study focused on using the applied approach and citing numbers and statistics in order to reach accurate results, and the ARDL and ECM model were used, in addition to the ARDL cointegrating and long run form model that demonstrated the long term and short term effects, to find out the extent of the real impact of the value-added tax on the Egyptian public revenues, and it was concluded that the value-added tax negatively affected the Egyptian public revenues, and in the study, ways to reach this result are presented.

This negative impact of the value-added tax on revenues is caused by the fact that Egypt exempts a number of small-sized companies whose sales of goods and services are less than 500 thousand pounds, and some retailers from value-added tax, and some service companies whose outputs are difficult to price, which reduces the taxable segment and increased the burden of tax on others. This study also concluded that the value added tax negatively affects public revenues in the short and long term, and the value of ECT is -0.441234.

1.1- Research Problem

Taxes are one of the most important state revenues, which have a major role in financing and improving the relationship between citizens and the government, as it is an effective tool for stimulating development in the country because it contributes to promoting economic growth and equality. Therefore, the main question that study deals with:

To what extent VAT affects on tax revenues? Sub-question:

To what extent investment, GDP per capita, inflation, grants, and public debt affect on tax revenues?

1.2- Research Hypotheses

There is a positive or negative relationship between the Value Added Tax (VAT) & the Egyptian public revenues.

1.3- Research Limitation

Through this study, we aim to measure the impact of the VAT on tax revenues, it has two spatial and temporal frameworks, regarding the spatial framework is Egypt. for the time frame, it defined the period (1990-2020).

1.4- Research Importance

The Importance of the study lied in answering the question to what extent the value-add tax set by the state affected public revenues, taking into account the impact of the rest of the variables that affect public revenues in Egypt.

1.5- Research Objectives

This study aimed to:

• Reviewing of theoretical framework for
• Explaining the effect of value-added tax on public revenues in
• Clarifying the types of the state’s public

2-  Background

2.1- Public Budget (Expenditures & Revenues) 

Public budge: is an extremely important component of the financial system, as a document for presentation and approval of state’s revenues and expenditures. The word budget comes from ancient Latin, where the word „bulga” meant a bag or a case full of money. Another definition State budget is a list of its probable revenues and expenditures, recorded and compared to reach their balance and submitted to the Parliament for approval ¹.

Expenditure: The term public expenditure takes on several meanings, including that it is an amount of money paid by a public person for the purposes of achieving a public goal, or satisfying a public need or desire, in other words, is the state paying a sum of money or a person affiliated with it to provide and achieve a public benefit. As for public expenditures, it is defined as all expenditures incurred by the government during a certain period, and public expenditures are classified according to the objective to:

¹ Official Website of The Ministry of Finance, State General Budget, available at: https://budget.gov.eg/

• Capital expenditures:

All expenditures paid by the government that lead to the establishment of investment assets or fixed assets that add to the value of the economy and are sometimes called development expenditures, such as:

• Spending on establishing government
• Construction of dams and other
• Health, education, and maintenance of state
• Production expenses and changes
• Production expenditures:

The term production expenditure refers to any expenditure incurred by the government to develop investment projects in the country with the aim of increasing the productive capacity (from AJSP)

• Non-productive expenditure:

Expenses that are incurred by the government and do not generate any income, such as expenses that pay interest. Expenses are divided into two main parts: (Management and investment or equipment expenses).

Revenues: are formed from tax revenues, then non-tax revenues of both regular and exceptional types. Tax revenue: it consists of Direct taxes (for example, income tax and corporate tax) and indirect (Value-Added Tax), & the rest of the fees imposed by the state, such as customs duties imposed on imports and exports, contract registration fees, and fines.

2.2- Definition of Taxes

Taxes are difficult both to define and to identify. The OECD interpretative guide defines a tax as follows: “the term tax is confined to compulsory, unrequited payments to general government”. Each of the underlined words in this definition of “tax”, poses problems: ²

² K.C. Messere and J.P. Owens, INTERNATIONAL COMPARISONS OF TAX LEVELS: PITFALLS AND INSIGHTS,

Organisation for Economic Co-operation and Development (OECD).

1. “Confined to”: there may be levies which are compulsory, unrequited payments to general government, but which it is preferred not to regard as One example is compulsory loans to government which have occurred in some countries.
2. “Compulsory”: is not without ambiguity, as can be seen by examining the following three areas: Contributions paid to social security For the most part, social security contributions are compulsory in the everyday sense that the payers have no choice as to whether or not they contribute.
3. “Unrequited”: is used in the sense that benefits provided by government to a taxpayer are not in proportion to the payments made by that Many borderline cases arise with regard for example to passport fees, driving licences, radio and television licences if public authorities provide the service, where it is difficult to decide whether they should be treated as taxes or as non-tax revenues.
4. “General government”: also provides In the OECD classification general government consists of supra-national authorities (in practice, the commission of the European Communities), the central administration and the agencies whose operations are under its effective control, state and local governments and their administrations, social security schemes and autonomous governmental entities, excluding public enterprises.

Taxes are unrequited in the sense that benefits provided by government to taxpayers are not normally in proportion to their payments. The term “tax” does not include fines unrelated to tax offences and compulsory loans paid to government. Borderline cases between tax and non-taxes revenues in relation to certain fees and charges ³. The performance of a tax must be gauged by more than the revenue it raises. It must also be assessed in terms of the efficiency and fairness with which it raises that revenue, and the costs incurred by government and taxpayer in doing so. Nonetheless, revenue needs are often a key concern, especially, in the introduction of a Value Added Tax ⁴.

Negotiating Group on the Multilateral Agreement on Investment (MAI), Organisation for Economic Co-operation and Development (OECD), DEFINITION OF TAXES (Note by the Chairman), April 196, All available documentation can be found on the OECD website: www.oecd.org/daf/investment.

⁴ L. Ebrill, M. Keen, J. Bodin & V. Summers, THE MODERN VAT, INTERNATIONAL MONETARY FUND WASHINGTON,

D.C. 2001, Publication Services 700 19th Street, N.W.,Washington, D.C. 20431, U.S.A.

of any country, as the tax policy is a mirror of the state’s economic and political orientations⁵.Thus, concentrating on defining taxation in general, its types, and objectives. In fact, taxes have been categorized in different ways on all the literature of public finance, but mainly it is according to who pays, or who carries the burden, and various other factors. In general, taxes are categorized as either direct or indirect (see figure 1).⁶

Source: McLure, C. E., Neumark, F., & Cox, M. S., 2019. “Taxation: Additional Information,”

Encyclopædia Britannica, available at https://www.britannica.com/topic/taxation.

⁵ Moheeth, M, 2019. “Classification of Taxes: 4 Types” Accounting Notes. Retrieved from, http://www.lapres.net/taxtypes.pdf.

⁶ Abo-Ahmed. K, Impact of Income and Corporate Taxes on Economic Development in Egypt, American University in Cairo, Master’s Thesis. AUC Knowledge Fountain.

state on individuals and companies, with the aim of financing the expenditures that the state must commit to provide social services, and the payment of salaries of employees in government agencies, to support and develop the infrastructure, and to support basic commodities. Thus, all kinds of taxes are the most important sources of government revenue.

2.3- Types of Taxes

OECD CLASSIFICATION OF TAXES ⁸

 

 

• Taxes on income, profits and capital gains
• Taxes on income, profits and capital gains of individuals
  • On income and profits
  • On capital gains
• Corporate taxes on income, profits and capital gains
  • On income and
  • On capital
• Unallocable as between (Taxes on income, profits and capital gains of individuals) and Corporate taxes on income, profits and capital
• Social security contributions
  • Self-employed or non-employed.
  • Unallocable as between (Corporate taxes on income, profits and capital gains), (Employers) and (Self-employed or non-employed).
• Taxes on payroll and

⁷ McLure, C. E., Neumark, F., & Cox, M. S., 2019. “Taxation: Additional Information,” Encyclopædia Britannica. https://www.britannica.com/topic/taxation.

⁸ Economic Co-operation and Development (OECD), Revenue Statistics INTERPRETATIVE GUIDE, Annex A, The OECD classification of taxes and interpretative guide, REVENUE STATISTICS 2021 © OECD 2021.

• Taxes on property.
• Recurrent taxes on immovable
• Recurrent taxes on net wealth.
• Estate, inheritance and gift
  • Estate and inheritance
  • Gift taxes.
• Taxes on financial and capital
• Other non-recurrent taxes on
  • On net
  • Other non-recurrent.
• Other recurrent taxes on
• Taxes on goods and
• Taxes on production, sale, transfer, leasing and delivery of goods and rendering of
• General
  • Value added taxes “VAT”.
  • Sales
  • Other general taxes on goods and
• Taxes on specific goods and
  • Profits of fiscal
  • Customs and import
  • Taxes on exports.
  • Taxes on investment goods.
  • Taxes on specific

• Other taxes on international trade and
• Other taxes on specific goods and
• Unallocable as between (General taxes) and (Taxes on specific goods and services).

• Taxes on use of goods or on permission to use goods or perform
  • Recurrent taxes.
  • Paid by households in respect of motor
  • Paid by others in respect of motor
  • Other recurrent
• Nonrecurrent

– Unallocable as between (Taxes on production, sale, transfer, leasing and delivery of goods and rendering of Services) and (Taxes on use of goods or on permission to use goods or perform activities)

• Other
  • Paid solely by

The main fees and charges in question and their normal treatment in this classification is as follows:-

• Non-tax revenues: court fees; driving licence fees; harbour fees; passport fees; radio and television licence fees where public authorities provide the
• Taxes of Taxes on use of goods or on permission to use goods or perform activities: permission to perform such activities as distributing films; hunting, fishing and shooting; providing entertainment or gambling facilities; selling alcohol or tobacco; permission to own dogs or to use or own motor vehicles or guns; severance taxes.

The ministry of finance manages the tax system in Egypt, and the main responsibilities are under the control of the Egyptian tax authority. Taxation system in Egypt is like all the countries can be split into two groups, which are direct taxation of persons and legal entities on their wages or benefits, and indirect taxation of products and services. Thus, this chapter aims to illustrate the historical evolution of the tax system, with an overview of income and corporate tax structure in Egypt. The structure of the Egyptian tax system includes both direct taxes and indirect taxes (see Figure 2).⁹

Figure 2. The Egyptian Tax System

Source: Mahmoud M. Abdellatif and Prof. Yokinobu Kitamura. Mr. Abdellatif, The Egyptian Tax System and Investment Tax Incentives, Keio University, Japan.

⁹ Mahmoud M. Abdellatif and Prof. Yokinobu Kitamura. Mr. Abdellatif, The Egyptian Tax System and Investment Tax Incentives, Keio University, Japan.

The Value Added Tax (VAT) is a relatively new tax. It was designed by two people, independently, in the early 20^th century. To Wilhelm Von Siemens, a German businessman, the VAT was a way to resolve the cascading problems that arose in implementing gross turnover taxes and sales taxes ¹⁰.

Governments have implemented the VAT largely as an improved sales tax, for example, European countries have largely used the VAT to reduce or eliminate other sales taxes. The countries continue to maintain separate corporate income taxes. So there are many European countries enacted a VAT in the 1960s and 1970s. Other countries followed in the 1980s and thereafter. Moreover, US policymakers have found it tempting to consider the VAT, but no one seems to be able to muster the courage to call it by its real name. The “destination-based cash flow” tax that House Speaker Paul Ryan and Ways and Means Committee Chair Kevin Brady proposed in the 2016 Republican “blueprint” is just a VAT with a wage deduction.

Value-Added Tax or VAT, first introduced less than 50 years ago, remained confined to a handful of countries until the late 1960s. Today, however, most countries have a VAT, which raises, on average, about 25 percent of their tax revenue. It defined what is meant by a VAT documents both the remarkable spread and the current reach of the tax, considers the differences between countries with and without the tax & develops some stylized facts on the typical experience of countries that have adopted a VAT ¹¹.

Adoption of the VAT began slowly. Early proposals to introduce the tax were made in France in the 1920s7 and by the Shoup Mission to Japan in 1949. Taking the definition used in this report, the first VAT appeared in France in 1948;8 this tax, which initially applied up to the manufacturing stage and gave no credit for tax on capital goods, was converted to a consumption-type VAT by 1954 ¹².

¹⁰ The Tax Policy Center (TPC), Briefing Book, available at website: https://www.taxpolicycenter.org/briefingbook/what-history- vat#:~:text=The%20value%2Dadded%20tax%20(VAT,turnover%20taxes%20and%20sales%20taxes.  ¹¹ International Monetary Fund (IMF) e-library, available at the formal website: https://www.elibrary.imf.org/display/book/9781589060265/ch01.xml?lang=en&language=en.

¹² L. Ebrill, M. Keen, J. Bodin & V. Summers, THE MODERN VAT, INTERNATIONAL MONETARY FUND WASHINGTON,

D.C. 2001, Publication Services 700 19th Street, N.W.,Washington, D.C. 20431, U.S.A.

Manufacturing level VATs were subsequently adopted by Côte d’Ivoire in 1960 and in Senegal later in the 1960s;9 Michigan, meanwhile, introduced the Single Business Tax10 an accounts-based form of VAT in 1953. Beginning in the late 1960s, the spread of VAT accelerated (see Table 1). Brazil introduced the tax to South America in 1967, 11 the same year in which the adoption by Denmark began its widespread introduction in Europe. The pace of VAT implementation remained rapid until the late 1970s, at which point it slackened for a decade before picking up again in the latter part of the 1980s and well into the 1990s. The principal focus of this book is the spread of the VAT in this latest round of implementations.

Table 1. Regional Spread of VAT

 

 The standard VAT rate is 14% as of the financial year 2017/18 (i.e. as of 1 July 2017, previously 13%). The standard rate is applicable to all goods and services, however, the reduced VAT rate of 5% is applied to the machinery and equipment that are necessary for producing goods or providing services. As per the amended VAT law no 3 for the year 2022 that stipulated suspending the 5% reduced rate of the machinery and equipment that was used for the purpose of industrial production activities for one year from the importation date and might be extended for a further one year.

Then, such machinery and equipment may be exempt from VAT in case it has been proved that they are only used for industrial production activities, otherwise, the due VAT should be paid alongside the due additional tax.

It’s Important to note that the exported goods & services are to be subject to zero % ¹³. The VAT law no. 67 of 2016, stated That the goods and services exported by projects operating within the economic zones of special nature are now subject to VAT at 0%.

Moreover, the imported goods and services to economic zones of a special nature for the purpose of practicing licensed activities shall be subject to VAT at 0% as well. The VAT law exempts a number of basic goods and services that affect low- income earners. The VAT law includes a reverse-charge (RC) mechanism, whereby transactions involving non-residents providing services/royalties to Egyptian resident entities are subject to VAT in Egypt

2.6- Definition of VAT

VAT is not generally intended to be a tax on value added as such: rather it is usually intended as a tax on consumption. Its essence is that it is charged at all stages of production, but with the provision of some mechanism enabling firms to offset the tax they have paid on their own purchases of goods and services against the tax they charge on their sales of goods and services. VAT is a broad-based tax levied on commodity sales up to and including, at least, the manufacturing stage, with systematic offsetting of tax charged on commodities purchased as inputs against that due on outputs ¹⁴.

¹³ The former website of PWC, “Egypt: Issuance of Law No.3 to update the VAT and Stamp Tax” Laws, February, 2022, available at: https://www.pwc.com/m1/en/services/tax/me-tax-legal-news/2022/egypt-issuance-of-law- numberthreetoupdatevatandstamptaxlaws.html#:~:text=67%20of%202016.&text=The%20goods%20and%20servie s%20exported,VAT%20at%200%25%20as%20well.

¹⁴L. Ebrill, M. Keen, J. Bodin & V. Summers, THE MODERN VAT, INTERNATIONAL MONETARY FUND WASHINGTON,

D.C. 2001, Publication Services 700 19th Street, N.W.,Washington, D.C. 20431, U.S.A.

VAT are that is a broad-based tax levied at multiple stages of production, with taxes on inputs credited against taxes on output. As while sellers are required to charge the tax on all their sales, they can also claim a credit for taxes that they have been charged on their inputs.

The advantage of such a system is that revenue is secured by being collected throughout the process of production, unlike a retail sales tax, but without distorting production decisions, as a turnover tax does.

For example, that firm A sells its output (assumed, for simplicity, to be produced using no material inputs) for a price of $100 (excluding tax) to firm B, which in turn sells its output for $400 (again excluding tax) to final consumers. Assume now that there is a VAT with a 10 percent rate. Firm A will then charge firm B $110, remitting $10 to the government in tax. Firm B will charge final consumers

$440, remitting tax of $30: output tax of $40 less a credit for the $10 of tax charged on its inputs. The government thus collects a total of $40 in revenue. In its economic effects, the tax is thus equivalent to a 10 percent tax on final sales, but the method of its collection secures the revenue more effectively.

2.7- Importance of VAT

VAT is a major source of revenue in many countries wherever it has been adopted. The standard rate is higher in Western Europe and in the transition economies than elsewhere, being lowest in the Asia/Pacific region. The standard rate is higher in Western Europe and in the transition economies than elsewhere, being lowest in the Asia/Pacific region. In contrast, it is the regions in which the spread of VAT has been most recent that typically have the simplest VAT tax structures (see Table. 2).

Those countries that have implemented a VAT are relatively more developed (as gauged by per capita GDP). They also rely somewhat less on international trade this is of interest since, the ability of the VAT to tax neatly international trade transactions is one of the principal merits conventionally claimed for the tax ¹⁵.

Refunds of VAT can be substantial. As shown in Table 3, the amount of VAT refunds as a percentage of gross VAT collections averages 30 percent or more in half the regions surveyed. In some economies (e.g., Slovak Republic and Canada), refund levels exceed 50 percent of gross VAT collections ¹⁶.

¹⁵ L. Ebrill, M. Keen, J. Bodin & V. Summers, THE MODERN VAT, INTERNATIONAL MONETARY FUND WASHINGTON,

D.C. 2001, Publication Services 700 19th Street, N.W.,Washington, D.C. 20431, U.S.A.

¹⁶ IMF Working Study, “VAT Refunds: A Review of Country Experience”, prepared by G. Harrison & R. Krelove, Authorized for distribution by Jean-Paul Bodin, November 2005 WP/05/218, © 2005 International Monetary Fund.

So the determinant of country’s VAT refund level (in percent of gross VAT collections) is influenced by a number of factors, including:-

• The nature of the economy (e.g., extent to which investment generates excess VAT credits, value added of export industries, and proportion of taxable and zero-rated sales in the economy).
• The design of the VAT system, particularly the extent of zero-rating and use of multiple rates.
• Taxpayer compliance behavior and extent of VAT
• The system and culture of the tax administration (e.g., level of corruption, capacity to detect and prevent VAT fraud, and commitment to taxpayer service in meeting statutory payment

Therefore, the refunds of VAT will be higher in:-

• Faster-growing economies (both because investment will be higher and more of it is likely to be by new firms with no output tax against which to offset credits).
• More open

2.8- Pros & Cons of VAT Pros

• VAT helps raise government revenues without punishing wealth or
• Replacing other taxes with a VAT would close tax It is based on consumption and therefore encourages saving.¹⁷

Cons

• VAT would be felt less by the wealthy as lower-income earners would pay a higher percentage of their earnings in taxes with a VAT
• It creates higher costs for businesses & local governments are unable to set localized tax

2.9- Relationship between Tax Revenues and the Independent Variables

 

When looking at previous studies, it will be noted that there were some independent variables that affect revenues and them Public debt of GDP, Grants, Inflation, GDP per capita, Investment and through the recent events in Egypt, a new variable will be added, which is the value-added tax, because it is a new type of tax that the Egyptian government takes in recent years, to see what effect this variable has with these aforementioned variables on taxes in Egypt

¹⁷ Finance Statistics website, Written by True Tamplin, BSc, CEPF®, Reviewed by Editorial Team Updated on March 12, 2023, available at: https://www.financestrategists.com/tax/valueaddedtax/?gclid=Cj0KCQjw2v- gBhC1ARIsAOQdKY3dh_k7H8Vo6HKxFv9OT7KxgGE5Az9xY40yutkcN1zaFLBP0wtxtsoaAgtyEAL w_wcB.

• Effect of Public Debt on Revenues

When looking at the public debt, the debt negatively affects the economic growth of countries, which lead to the weakness of the state because it was unable to pay its debts, which leads the state to increase taxes to increase revenues to help it pay debt installments.¹⁸

• Effect of Grants on Revenues

Grants reduce the burden on the budget deficit of the state, and this is through the fact that the grants increase the general taxes of the state, but they were not a strong reason for increasing the revenues, as the grants were variable and not fixed, and if countries depend on them for revenues, they may go bankrupt at any time. It was stopped as a result of the political and economic changes that were taking place in the global area.¹⁹

• Effect of Inflation on Revenues

CPI Consumer Price Index scale was used to measure the impact of inflation, and therefore to study the extent of the impact on revenues, and it was noted that with the increase in prices of goods and services, the revenues collected through taxes increase.

• Effect of GDP per Capita on Revenues

When noting the effect of GDP on revenues, there was a positive effect, as with the increase in GDP per capita, this worked to increase the physical liquidity, which lead to an increase in revenues.

• Effect of Investment on Revenues

Investments were measured through the GFCF index, which is gross fixed capital formation (current U$). Through this measure, the positive impact on revenues will be noticed. Direct investment increased job opportunities and increased the labor tax paid by workers in the state and also on the other hand.

¹⁸ Stephen G Cecchetti , 2011 , the real effect of debt , BIS Working studys No 352

¹⁹ Hansjörg Blöchliger , 2009 , TAXES AND GRANTS , ON THE REVENUE MIX OF SUB-

CENTRAL GOVERNMENTS , OECD Network on Fiscal Relations Across Levels of Government

Buying and selling process will increase, including an increase in the tax rate on sellers, and on the other hand, the increase in taxes paid by investors will be noticed when they make direct investment within the borders of the state.

• Effect of VAT on Revenues

Added apportionment tax was from the superficial side that works to increase the taxes that were collected by the state, but it worked to reduce taxes, but not in a large way, and this was through that this tax will hinder local and foreign investors in investing within the country and this reduction of the state’s revenues as a result of reducing investments, and also with the presence of value-added tax, a disruption will occur in the state’s economic market as a result of the investor’s goal is to reduce costs and increase profits, and with these taxes, the cost of production is increased what reduces profits in general.²⁰

3-  Literature Review

Abhijit Sen Gupta, (2007)²¹ :

This study contributed to the existing empirical literature on the principal determinants of tax revenue performance across developing countries by using a broad dataset and accounting for some econometric issues that were previously ignored. The results confirm that structural factors such as per capita GDP, agriculture share in GDP, trade openness and foreign aid significantly affect revenue performance of an economy. Other factors included corruption, political stability, share of direct and indirect taxes etc. This study made use of a revenue performance index, and found that while several Sub Saharan African countries are performing well above their potential, some Latin American economies fall short of their revenue potential.

²⁰ Santiago Acosta, 2019 , The Value Added Tax and Growth: Design Matters , IMF working study , International Monetary Fund

²¹ Abhijit Sen Gupta, IMF Working Study, Determinants of Tax Revenue Efforts in Developing Countries, Authorized for distribution by Cyrille Briançon, July 2007.

Michael Keen and Ben Lockwood, (2007)²² :

This study attempted to explore the causes and consequences of the spread of VAT using a panel of 143 countries observed over the period of 25 years. This study estimated two iterative equations that characterized both the decision to adopt a VAT (using adoption equation which estimated by dynamic probit model) and the impact of the VAT on revenue once it has been adopted (using revenue equation estimated by OLS or by GMM). This study concluded that the International Monetary Fund had played an independent role and an important role in the spread of the value- added tax: participation in the International Monetary Fund’s non-crisis program greatly increases the possibility of implementing the value-added tax and increases the number of countries in the region that have adopted the leadership of the value- added tax. The country is embracing it while the results strongly suggested that more open economies, all else being equal, are less likely to adopt a VAT.

It also founded that the impact of value-added tax on revenues is positive, but modest, and the impact of value-added tax can change according to country conditions, as it can reflect negatively, as the results indicated. The gains were greatest in higher-income countries and more open economies.

Joseph Raymond Pudenz (2010)²³ :

This study discussed the value-added tax & its effects on tax revenue in United States, corporations and individual taxpayers by using the historical methodology. The purpose of this study was to explore the potential effects a value-added tax system would create if implemented in US. In addition, the effects of a corresponding decrease in the income tax will be studied. In particular, the overall effects on governmental revenue generation, domestic corporations’ tax burden, and individual taxpayers’ tax burden will be addressed. The result showed that the value- added tax, along with a complete elimination of the corporate income tax and a reduction of personal income taxes by 50%, would still increase tax revenues and allow the United States to better deal with its high national debt.

²² Lockwood, Ben, and Michael Keen, (2007), Value-Added Tax: Its Causes and Consequences, International Monetary Fund.

²³ Pudenz, Joseph Raymond, “The value-added tax: Effects on tax revenue, U.S. corporations, and individual taxpayers”, (2010), Honors Program Theses, 65.

Evaluated the resulting tax revenue and consider the tax revenue generated by the value of added tax, once these issues are resolved, it was possible to start assessing the impact of the proposed tax structure on the tax burdens of companies and individuals.

Christian Ebeke & Helene Ehrhart (2011)²⁴ :

This study examined whether or not the adoption of VAT in developing countries is an effective way of stabilizing tax revenues for the period from 1980 to 2000 by using a large panel of 103 developing countries & several alternative estimation methods to deal with the self-selection bias & the endogeneity issue inherent in VAT adoption. The results highlighted a negative and significant effect of the presence of VAT on tax revenue volatility. Do not reject the null hypothesis of the Hansen test, which means that the instruments are valid. The effect of VAT remains significantly negative at the 5% level, indicating that VAT reduces tax revenue instability.

The lagged level of tax instability is correlated with the error term due to the presence of country fixed effects. The presence of VAT leads to significantly lower tax revenue instability as the countries with VAT experienced 40 – 50 % less tax revenue instability than countries which don’t have a VAT system.

Farzana Lalarukh (2013)²⁵ :

This study discussed the effect of VAT on the GDP of Bangladesh for the period from 1991 to 2012 by using the qualitative method. The purpose was to increase the revenue base of government and make funds available for developmental purposes that would accelerate economic growth. The objective of this study was to determine the contribution of VAT to the GDP of Bangladesh, more specifically, understanding how VAT is contributing to the GDP growth of the country. The result concluded that the value added tax had a positive relationship with gross domestic product and was contributed to the economic growth of the country, finding the positive relation is important to any economy

²⁴ Christian Ebeke & Helene Ehrhart, Does VAT reduce the instability of tax revenues?, CERDI, Etudes et Documents, E 2011.24.

²⁵ Farzana Lalarukh, Contribution of VAT to the GDP of Bangladesh: A Trend Study, Journal of Business Studies, Vol. XXXIV, No. 2, August 2013.

This result could help decision makers in the country to use Value Added Tax (VAT) as a tool for effective revenue generation and price stability, final result GDPt

= 1.928 + 0.9431VAT + e.

Francis Omondi, (2013)²⁶ :

This study aimed to establish the VAT reforms and revenue productivity in Kenya for the period from 1990 to 2010 by using the Ordinary Least Square (OLS) method, log-transformation & employed Proportional Adjustment (PA) technique. The object of this study was to evaluate reforms that has taken place in VAT since 1990, analyze VAT productivity by use of tax buoyancies and elasticities & to come up with policy recommendations. This study identified Kenya’s VAT as one of the revenue sources that is not fully utilized to find out whether it can help to generate additional revenue to the government to help in financing the growing budget deficit. The results concluded that VAT buoyancy was slightly greater that VAT elasticity for the period under study. This means that the VAT reform process had not yet achieved its goal. Kenya’s VAT is widely inefficient and this could be attributed to several factors namely, rampant tax evasion, tax avoidance, existence of underground economy.

Dasalegn M. Jalata, (2014)²⁷ :

This study analyzed the role of VAT on economic growth of Ethiopia for the period from 2003 to 2012 based on theoretical and empirical evidence & also indicated how many percentages each of them made changes for economic growth through GDP by using descriptive statistics and multiple regression statistical methods of both SPSS statistical package version 20.0 and STATA/SE version 11.0 was employed. This data was collected from Ministry of Finance and Economic Development, Ethiopian Economic Associations. The finding of this study reveals that as compared to sales tax, VAT boosts the general economic growth of Ethiopia but the issue of regressively resembling to sales tax still continues.

²⁶ Francis Omondi, (1990 – 2010), VAT reforms and revenue productivity in Kenya, The school of Economics, Univercity of Nairobi, published in Aug 2013.

²⁷ Dasalegn Mosissa Jalata, The Role of Value Added Tax on Economic Growth of Ethiopia, Department of Accounting and Finance, College of Business and Economics, Wollega University, Post Box No: 395, Nekemte, Ethiopia, ISSN: 2226-7522(Print) and 2305-3327 (Online) Science, Technology and Arts Research Journal.

Also showed that all variables of VAT, TTR and NTR except the FR, were significant at 5% level of significance. However, all variables including FR were positively contributed for economic growth during the periods under review.

All variables of VAT, TTR and NTR except the FR, were significant at 5% level of significance. At 1% increase in TTR excluding VAT revenue would cause about 35.87% increase in GDP. At 1% increase in NTR will cause about 53.59% increase in GDP and even though FR of both external aided and external loan was insignificant at 5% level of significance. At 1% increase in FR will cause about 5.1

% increase in GDP keeping other factors constant.

Gerardo Ángeles Castro, Diana Berenice Ramírez Camarillo, (2014)²⁸ :

This study analyzed the impact of economic, structural, institutional and social factors on tax revenue, across 34 countries from the Organization for Economic Co-operation and Development for the period from 2001 to 2011by using static and dynamic panel data techniques, as in static method.

It also used fixed effect model (FE) and in dynamic method & the generalized method of moments (GMM) estimation to study the impact of economic factors such as the per capita GDP, structural and institutional factors such as political stability and political rights and social freedoms such as gross tertiary school enrolment on tax revenues. This study divided the countries in the sample into two groups with middle and high incomes to see the impact of the previous factors on each of them. The research also studies the effect of the lagged value of tax revenues on its current value, during the period from 2001 to 2011.This study concluded that domestic product per capita, the industrial sector, and civil liberties have positive impact on tax revenue, while the agricultural sector and the share of foreign direct investment in gross fixed capital formation have negative impact. The lagged value of the dependent variable enters positively in the equation and its effect is larger in high income countries.

²⁸ Ángeles Castro Gerardo and Ramírez Camarillo Diana Berenice, (2014), Determinants of tax revenue in OECD countries over the period 2001-2011, Contaduríay Administración, 59, (3), 35-60.

Olawale Luqman (2014)²⁹ :

This study discussed the impact of value added tax on revenue generation in Nigeria for the period from 1994 to 2012 by collecting data from CBN statistical bulletin, gathered from journals and textbook. The result of the analysis showed that that there was a significant relationship between value added tax and consolidated revenue generation in Nigeria at 5% level of significance. This study also indicated that if more goods and services are taxed, the revenue base of the country will increase. The value added tax bases be widened to bring the informal sector into the value added tax net so as to stem possible evasion even by the so faithfully complying under the old rate. The Petroleum profits taxes affected PPT 72.1%, Income 6.2%, Custom 4.9%, & Value added taxes 19.2 %.

Rajeshwari U. R. (2015)³⁰ :

This study discussed Value added taxes & its impact on revenue generation in India for the period from 2005 to 2014 by using ANOVA model. Data analysis was performed with the use of stepwise regression analysis. The result showed that Value added tax had statistically significant effect on revenue generation as the tax revenue

= 73% in total revenues, & the value added taxes increased from 70% to 73% in tax revenues.

Richard Bird and Michael Smart, (2016)³¹ :

This study aimed to show the introduction of the VAT in Canada, initially in the form of the federal GST in 1991 and the role of sales and excise taxes in government revenues and in the Canadian economy for the period from 1981 to 2014. Analyzed the progressive or regressive effects of the tax system. This study used standard fiscal incidence model to analyze data. The result concluded that the value added tax did not lead to a major change in the tax mix even after most provincial sales taxes also became VATs. Canadians do not pay much more in taxes on their consumption than they did 25 years ago.

²⁹ Luqman, Olawale, The Impact of Value Added Tax on Revenue Generation in Nigeria, June 20, 2014, Olabisi Onabanjo University (OOU).

³⁰ RAJESHWARI. U. R, Value added tax and its impact on revenue generation in India, Christ University, Bangalore, India, Vol 2, No 8 (2015).

³¹ Bird, Richard and Smart, Michael, (2016), “Taxing Consumption in Canada: Rates, Revenues, and Redistribution”,

ICEPP Working Studys. 195.

The study argued that there is a better case for using consumption than income as a basis for evaluating the progressivity of sales and excise taxes, and that the GST and its companion taxes appear on this measure to be mildly progressive, although the marked regressively of the remaining excises means that even on this basis the sales and excise system remains mildly regressive.

Branimir Kalas & Nada Milenkovic (2017)³² :

This study examined the effects of VAT on the economy and its relevance and position of total tax revenue for the period from 2005 to 2014 by using descriptive statistics and regression analysis it was determined the strong and positive correlation between logarithms values of value-added tax and gross domestic product, value-added tax revenues, value-added tax and total revenues, but there is statistically no significant effect of observed variables. The results concluded that VAT doesn’t significantly impact on GDP, TAXR, and TOTR. Relationship between observed variables was strong and positively. Topic that wasn’t sufficiently researched in Serbia and there weren’t many studies that analyzed this topic in Serbia. The future study could consider the same research topic with the analogous country as a comparative study and enhance the knowledge in the field.

Tigist Taye (2017)³³ :

This study examined the effect of Value Added Tax on Revenue Generation in the Sululta Town Branch of the Oromia Revenue Authority for the period from 2004 to 2009 by using qualitative model of socio-demographic to study to what extent had the introduction of Value Added Tax in Sululta tax system effect on revenue generation of the town. The final result from the socio-demographic background of the 75 taxpayers was observed that the age of the respondents was between 18-30/Young/ years old are 25 respondents, between 31-50, different degree according to Age & education moreover that was a positive effect between value add tax & revenues.

³² Branimir Kalas & Nada Milenkovic, The role of Value Added Tax in the Economy of Serbia, University of Novi Sad, Faculty of Economics Subotica, Vol. 63, april-june 2017, No 2, ISSN 0350-137X, EISSN 2334-9190, UDK 338 (497,1),

78. 69-78.

³³ Tigist Taye, The Effect of Value Added Tax on Revenue Generation in the Sululta Town Branch of the Oromia Revenue Authority, Date: 2017-06.

Kaisa Alavuotunki, Mika Haapanen & Jukka Pirttilä, (2019)³⁴ :

This study investigated the effects of value-added tax on revenue and inequality for the period from 1975 to 2010 in 90 countries by using the fixed effects OLS model as well as a fixed effect instrumental variable (IV) model with the VAT variable being instrumented because there may be unobservable effects that influence both the dependent variable and VAT adoption. The result concluded that the revenue consequences of the VAT have not been positive. This result indicated that income-based inequality had increased due to the VAT adoption, whereas consumption inequality has remained unaffected.

Santiago A. Ormaechea & Atsuyoshi M. (2019)³⁵ :

This study examined whether the value added tax (VAT) may have different effects on long-run growth depending on whether it is raised through the standard rate or through C-efficiency. Assembling a novel dataset for 30 OECD countries for the period from 1970 to 2016 by using the pooled mean group (PMG) methodology, to estimate the long-run growth effects of the VAT in a cross-country setting & Autoregressive Distributed Lag (ARDL) models were estimated for each country. The results concluded that for the given total tax revenue, the rise in the VAT was financed by a fall in income taxes & promoted growth only when the VAT is raised through C-efficiency. For the given VAT revenue, the rise in C-efficiency, offset by a fall in the standard rate also promoted growth. Thus the implications were that in OECD countries broadening the VAT base through fewer reduced rates and exemptions was more conducive to higher long-run growth than a rise in the standard rate.

Marcelo Piancastelli, (2020)³⁶ :

This study measures the tax effort of a group of fifty-nine developed and developing countries for the period from 1996 to 2015.

³⁴ Kaisa Alavuotunki, Mika Haapanen & Jukka Pirttilä, (2019), The Effects of the Value-Added Tax on Revenue and Inequality, The Journal of Development Studies, 55:4, 490-508, DOI: 10.1080/00220388.2017.1400015.

³⁵ IMF Working Study, Institute for Capacity Development, The Value Added Tax and Growth: Design Matters, prepared by Santiago Acosta-Ormaechea and Atsuyoshi Morozumi, Authorized for distribution by Charles Kramer May 2019.

³⁶ Marcelo Piancastelli, The determinants of tax revenue and tax effort in developed and developing countries: theory and new evidence 1996-2015, Institute for Applied Economic Research (IPEA), University of Kent.

By comparing a country’s actual tax/GDP ratio with the ratio predicted derived from an international tax function which relates tax revenue to various measures of a country’s taxable capacity such as the level of per capita income; the share of trade in GDP; the productive structure, and the level of financial deepening. The results were compared and showed a range of tax effort from South Africa with the highest effort and Switzerland with the lowest effort. Implications for policy were drawn. This study was critical of studies that included institutional variables (and other variables not related to the tax base of countries) to measure tax effort when they were really explanations of why the tax ratio differs between countries not of tax effort itself.

Meshari Alhussain, (2020)³⁷ :

This study aimed to identify the impact of value-added tax (VAT) on Saudi banks, through measuring the impact of changes in the banks before and after the implementation of Value Added Tax (VAT), in all of total assets, total liabilities, customer deposits, retained earnings, total operating income, total operating expenses and net operating income targeted the fourth quarter of 2017 (before the implementation of VAT), and the first and second quarters of 2018 (after the implementation of VAT).

This study found that there was a slight decline in total assets, total liabilities, customer deposits and current accounts, in addition to a significant decline in retained earnings, total operating expenses after the implementation of VAT & a slight increase in the total income of operations and a significant increase in net operating income after the implementation of value-added tax. There were no statistically significant differences between total assets, total liabilities, customer deposits, current accounts, total operating income, total operating expenses, net operating income before and after the implementation of value-added tax while there were statistically significant differences between retained profits before and after VAT.

³⁷ Meshari Alhussain, The impact of value-added tax (VAT) implementation on Saudi banks, Department of Accounting, Faculty of Business Administration, Umm Al-Qura University, Saudi Arabia.

Jean Bosco Harelimana & Claudine Mukagashagaza, (2020)³⁸ :

This study aimed to show the effect of value added tax reforms on revenues performance in Rwanda for the period from 2015 to 2019 by using qualitative and quantitative approach. In quantitative approach the study employed data in form of numbers collected from employees in RRA. Qualitative was used through interviews in order to establish the effect of Value added tax Reforms on Revenue Performance in Rwanda. The target population is 2791 small taxpayers and 109 medium active taxpayers registered on VAT tax under the domestic taxes department Kicukiro block, and the 6 staff from RRA Kicukiro block.

Hence the total target population is 2906 respondents. The results demonstrate that the unit increased in the use of EBM increased VAT collection performance by about 0.576 units, while other variables remained constant. One-unit increased in administrative fines would increase the VAT collection performance by about 0.289 units if other variables remained constant. Finally, a unit change in taxpayers training would increase VAT collection performance by about 0.130 units, while other variables remained constant.

Beh K. Kiang, (2021)³⁹ :

This study examined the determinants of tax revenues in Malaysia for the period from 1989 to 2018 by using the annual data for the six variables: foreign direct investment, public debt, openness level, GDP per capita, inflation rate and sharing of manufacturing. This study founded that all-time series variables are non- stationary at their level form after using unit root test. Also when they used ARDL bound test they found that foreign direct investment, public debt and opennes level affect positively on tax revenues while GDP per capita, inflation rate and sharing of manufacturing affect negatively on tax revenues. After using Granger Causality Tests Based on VECM Estimation they founded that foreign direct investment and public debt are co-integrated and has long run causality with the tax revenues.

³⁸ Jean Bosco Harelimana, Effect of Value Added Tax Reforms on Revenue Performance in Rwanda Revenue Authority, Op Acc J Bio Sci & Res 1(3) -2020.DOI: 10.46718/JBGSR.2020.01.000016.

³⁹ Beh K. Kiang, Cheah Hon Chiew, Chek Wen Hao & Lim Yong Foong, Determinants of tax revenue in Malaysia, Univesiti Tunku Abdul Rahman, Faculty of Business and Finance , Department of Economics, May (2021).

Khaled Abo-Ahmed (2021)⁴⁰ :

This study examined how do corporate and income taxes impact economic development in Egypt for the period from 1980 to 2018 by using the analytical quantitative method & the approach based on annual time series data by using Autoregressive distributed lag (ARDL) model to estimate two models, the first estimation is between direct taxes (corporate and income taxes) and Growth domestic product (GDP) growth as dependent variable, & the second one by using human development index (HDI) instead of GDP growth. The result concluded that there is negative short-run impact only of the direct taxes (corporate, income taxes) on the economic development (HDI) in Egypt, at significance level 5% by fixing all other factors. Taxes have a positive and negative effect on both economic growth and economic development as taxes (revenues) are spent effectively on public expenditure such as improving the quality of education, health care system, technical development etc. Consequently, both economic growth and economic development can only be positively impacted. On the other hand, if the country uses the tax revenues to fund its budget deficit, this would have a negative effect on its economic development.

Mariam Barsoum, (2021)⁴¹ :

This study measured the effect of applying value added tax on public revenues in Egypt for the period from 2007 to 2019 by using Multiple regression model .This study concluded that there was a positive relationship between value-added tax and public revenues, as it represented 62.3% of public revenues, which evidence that the value-added tax contributed about two-thirds of the total public revenues, in addition to the fact that each percentage point of the value-added tax increased the public revenues by 4.597 which indicated its positive impact on public revenues.

⁴⁰ Abo-Ahmed. K, Impact of Income and Corporate Taxes on Economic Development in Egypt, American University in Cairo, Master’s Thesis. AUC Knowledge Fountain.

⁴¹ Mariam Barsoum, (2021), “Measuring the effect of applying value added tax on public revenues in Egypt”, Cairo University Journal.

Muthuri E. Kithurel, (2021)⁴² :

This study aimed to establish the efficacy of time series models as far as revenue. Using time series models on forecasting of Value Added Tax revenue in Kenya. Revenue Authority for the period from the financial year 2009/2010 to 2015/2016 with the general objective of exploring patterns in the data such as trend, seasonal components, cycles among others and further establish a suitable forecasting model which can be used to predict the amount of VAT revenue to be collected in a certain specified period. The results concluded that the forecasting using the model produced values which were under forecasted on several months making it unsuitable to forecast revenue collections of VAT. ARIMA this model underperformed compared to other models. ARIMA best fit model test and accuracy measure test showed that the model was better the former models, this was because the values were under forecasted only in two months.

Robert P. Inman, (2021)⁴³ :

This study presented one approach for developing the needed information by reviewing briefly the methodology of previous research on this problem an argued that past studies are generally incapable of answering the key policy questions.

This study also presented an alternative specification an econometric result & offered a few suggestions for future work. The results analyzed of price effects suggests that for matching aid services. There were only small decreases in taxation and small increases in expenditures on other service in all cases the total expenditures (own plus matching aid) on the aided service rise with matching grants implying a corresponding increase in services.

⁴² Muthuri E. Kithurel, Use of Time Series Models on Forecasting of Value Added Tax Revenue in Kenya Revenue Authority, ATCR Publishing, African Tax and Customs Review, ISSN (online) 2664-9535 (print) 2664-9527.

⁴³ Robert P. Inman, Towards an Econometric Model of Local Budgeting, collaborating with JSTOR, Assistant Professor of Economics and Public Policy Analysis Department of Economics and Fels Center of Government University of Pennsylvania Philadelphia, Pennsy, National Tax Association, 1971, Vol. 64 (1971), pp. 699-719

Renyan Mu, Fentaw N.M & Zhang L (2022)⁴⁴ :

This study aimed to assess how inefficient VAT audit function and related factors affect tax revenue performance & examined the effect of VAT audits on tax revenue performance in Amhara Region, Ethiopia by using primary data sources from 377 VAT registered taxpayers in Amhara Region. It also used the Ability to Pay theory of taxation, structural equation model, path diagram, and multiple regression with SPSS/AMOS software for data analysis to identify the relationship between VAT audit and tax revenue performance & also used both quantitative & qualitative research methods using a survey approach. This study assured that VAT audit and tax education significantly affect tax revenue performance. Long-time- served tax rates greatly influence tax revenue performance. The result assured that VAT audit, tax education, tax resource, and tax rate positively and significantly influence the dependent variable tax revenue performance. The outcome variable, tax revenue performance, was highly affected by VAT audit, tax education, tax resource, and tax rate positively and significantly so all the indicators of variables have a positive and substantial relationship with the predictor and the outcome variable. The implication of tax revenue was not making as much impact on economic development as on GDP of Egypt.

Overall, There were many studies that had positive relationship such as the study of Renyan Mu, Fentaw N.M & Zhang L (2022), it assured that VAT audit, tax education, tax resource, and tax rate positively and significantly influence the dependent variable tax revenue performance. Also the study of Olawale Luqman (2014) showed that that there was a significant relationship between value added tax and consolidated revenue generation in Nigeria at 5% level of significance. However, the study of Christian Ebeke & Helene Ehrhart (2011) showed that there was a negative and significant effect of the presence of VAT on tax revenue volatility. Also the study of Kaisa Alavuotunki, Mika Haapanen & Jukka Pirttilä, (2019) concluded that the revenue consequences of the VAT have not been positive.

⁴⁴ Renyan Mu, Fentaw N.M & Zhang L, The Impacts of Value-Added Tax Audit on Tax Revenue Performance: The Mediating Role of Electronics Tax System, Evidence from the Amhara Region, Ethiopia, School of Management, Wuhan University of Technology, China, Sustainability 2022, 14, 6105.

On the other hand, there were many studies that emphasized both positive & negative relationship such as the study of Beh K. Kiang, (2021) foreign direct investment, public debt and openness level affect positively on tax revenues while GDP per capita, inflation rate and sharing of manufacturing affect negatively on tax revenues. Also the study of Michael Keen and Ben Lockwood, (2007) the impact of value-added tax on revenues is positive, but modest, and the impact of value-added tax can change according to country conditions, as it can reflect negatively, as the results indicated.

4-   Theoretical Framework, Methodology & Data 4.1- Theoretical Framework & Methodology

This study used the autoregressive distributed lag model (ARDL) to measure the impact of the application of value-added tax on revenues during the period (1990- 2020), as it is considered the most appropriate model to measure the relationship between the obtained variables. Because it represents the dependent variable (Y) with its lags and its explanatory variables with its lags. The model does not require a large sample to obtain significant results, which is consistent with the collected data. In addition, the model can be applied when the time series is stationary on level I(0) or at first difference I(1), which is consistent with the results of the stationary tests in the next section ⁴⁵.

The ARDL model took the following equation:

Y_t = α₀ + α₁ y_t-1+       +β₀ x_t + β₂ x_t-1 +……+ u_t

So, the equation of the study would be:

𝑇𝑎𝑥_t = 𝛽₀ + 𝛽₁𝑡𝑎𝑥 _t-1 + 𝛽₂𝑣𝑎𝑡_t + 𝛽₃𝑑𝑒𝑏𝑡_t + 𝛽₄𝑔𝑟_t + 𝛽₅𝑐𝑝𝑖_t + u_t

⁴⁵ Farhan, A., & Abdullah, M. (2021). Error correction model for estimating the relationship between GDP and inflation in the Iraqi economy (1990-2020). International Journal of Nonlinear Analysis and Applications, 12(2), 1965-1979. Doi: 10.22075/ijnaa.2021.5328.

Where tax_t represented tax revenue (dependent variable) and tax_t-1 represented first lag of tax. In addition to the independent variables, which are value- added tax, debt, grants, and consumer price index, respectively.

The model also enabled us to know whether there is a long-term relationship between the variables by calculating the error correction model through the following equation:

∆Yt = α0 + Σ i=1αi1×∆yt-i+ Σi=0 α2i×∆x1t-i + … + Σi=0 α(k+1) i×∆xkt-i +β1 yt-1 + β2 x1t-1 + β k+1 xkt-1 + ut,

where the parameter β_i (for i = 1, 2, …, k+1) is the corresponding long-term relationship, while the parameter α_i (For i = 1, 2, …, k+1) is the short-term coefficient of the underlying ARDL model. Since the change caused by the application of value- added tax on revenues is not immediate, the error correction model enabled us to know the time it took for the effect to appear and the size of the effect Which helped in understanding the relationship more between the variables.

4.2- Data

This study analyzed the impact of Value-added Tax “VAT” on public revenues & how taxes especially the value added tax generates revenues to Egypt, explaining the main factors that may explain the change in tax revenue as a dependent variable by the grants, debt, gross fixed capital formation (GFCF) and GDP per capita, all as an independent variable in Egypt (1990-2020).

Tax revenue as a dependent variable we dividend it over exchange rate to get tax revenue with US $, grants as an independent variable excluding technical cooperation (Bop, current US$) with using log for it (log of grants), using gross fixed capital investment to measure the change in gross fixed capital investment by using the log change in it, GDP per Capita as an independent variable with using log GDP (log GDP per Capita), and Debt as an independent variable as percentage of GDP, see Table 1 of the descriptive statistics.

Table 4. Descriptive Statistics: GDP per capita, change in gross fixed capital formation, tax revenue, grants excluding technical cooperation, Log Consumer price index (CPI) & Log General government gross debt (Percent of GDP)
	Mean	Median	Standard Deviation	Minimum	Maximum	Num of observations
Log GDP per capita (US$)	3.1949	3.12462	0.233885	2.805	3.531326	30
Log change in gross fixed capital formation( current US$)	10.852	10.8499	0.029502	10.75	10.9241	30
Log tax revenue (US$)	10.248	10.1176	0.275252	9.723	10.59966	30
Log grants, excluding technical cooperation (BoP, current US$)	8.9975	8.955	0.303405	8.48	9.6849	30
Log Consumer price index (CPI)	1.8481	1.76161	0.336326	1.282	2.48163	30
Log General government gross debt (Percent of GDP)	1.9112	1.92428	0.052545	1.825	1.992554	22

Table 1 exhibited the descriptive statistics as GDP per capita (US$); the mean, median, standard deviation, min & max were 3.1949, 3.1246, 0.2339, 2.8048, 3.5313. The change in gross fixed capital formation (current US$) were 9.3125, 9.4677, 0.6556, 7.5891, 10.1450. The tax revenues (US$) were 10.1829, 10.0741,

0.2518, 9.7229, 10.5997.

The grants, excluding technical cooperation (BoP, current US$) were 9.0657, 9.0071, 0.27698, 8.6232, 9.6849. Consumer price index (CPI) were 1.848069,

1.761607, 0.336326, 1.282, 2.48163. General government gross debt (Percent of

GDP) were 1.911206, 1.924279, 0.052545, 1.825, 1.992554.

Figure 3. Plotting variables with log: General Government Gross Debt, Change in Gross Fixed Capital Formation, Grants Excluding Technical Cooperation & Consumer Price Index with log of Tax Revenues.

Theses graphs showed the relationship among each variable with tax revenues separately over time trend. They illustrated a positive relationship.

The sources of data which are Gross fixed capital formation, Tax revenue (US$), Grants, GDP per capita, Debt & Consumer Price Index (CPI), see Table.3.

Table 5. Data sources of variables used in this study

 

Variables	Measure	Data source
Gross fixed capital formation	Measures the change in gross fixed capital formation or investment.	World Bank Open Data, Indicator database (https://data.worldbank.org/indicator/NE.GDI.FTOT.CD)
Tax revenue (US$)	𝑇𝑎𝑥 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 (𝐸𝐺𝑃) 𝐸𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒	World Bank Open Data, Indicator database (https://data.worldbank.org/indicator/GC.TAX.TOTL.CN)
Grants	Grants, excluding technical cooperation (BoP, current US$).	World Bank Open Data. Indicator database (https://data.worldbank.org/indicator/BX.GRT.EXTA.CD.WD).
GDP per capita	Gross domestic product per capita (current US$) – Egypt, Arab Rep.	World Bank Open Data, Indicator database (https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locatio ns=EG)
Debt	Measures    the                   debt fluctuations in Egypt.	International Monetary Fund database (https://www.imf.org/external/datamapper/datasets)
Consumer Price Index (CPI)	Measures                              the aggregate price level of goods & services in the economy	World Development Indicators, World Bank (https://databank.worldbank.org/source/world-development- indicators)

5.1- Unit Root Test

Unit root test is important in knowing whether the time series is stationary or not to avoid falls in the trap of false regression that appears if the time series is not stationary. also, unit roots are crucial for determining if the time series needs to be differenced and if so, the number of times such differences should be taken to make it stationary (some series is I (1) and other series is I (2)). to do so There are many tests to find out the stationary of time series, but the most significant and common among researchers at a wide level are the Dickey/Fuller Test and Phillips Perron Test.

5.1.1 Augmented Dickey/Fuller Test

Dickey/Fuller Test has been developed to augmented Dickey/Fuller Test so this study going to use it for more accuracy and conduct it by EViews. The results of Augmented Dickey–Fuller Test showed in the following tables.

Table 6. Augmented Dickey-Fuller Test: On Level

 

	None	With intercept	Intercept and trend
Tax revenue (US$)	(3.082231)	(-1.882342)	(-2.915644) *
Gross fixed capital formation	(0.279777)	(-5.490224) ***	(-5.383546) ***
Grants	(-.561639)	(-4.252925) ***	(-3.675738) **
GDP per capita	(1.750862)	(-1.343902)	(-2.851651) *
Gross Debt	(0.341324)	(-3.625020) ***	(-3.39882)
Consumer price index	(2.654418)	(0.867991)	(-0.432684)

(***significant at 1% – ** significant at 5% – * significant at 10%)

	None	With intercept	Intercept and trend
Tax revenue (US$)	(-5.443907) ***	(-6.963414) ***	(-7.061646) ***
Gross fixed capital formation	(-8.869250) ***	(-8.696855) ***	(-8.474091) ***
Grants	(-2.630050) ***	(-5.507119) ***	(-5.423135) ***
GDP per capita	(3.079132) ***	(-3.671470) ***	(-3.630508) **
Gross Debt	(-4.854702) ***	(-4.475828) ***	(-4.888143) ***
Consumer price index	(-1.848376) *	(-3.145872) **	(-3.347961) *

The previous tables showed that the ADF test confirmed that the included variables are stationary after first difference I (1)

5.1.2 Phillips Perron Test

It is also a test for unit root. The null hypothesis of the Phillips-Perron (PP) test is that there is a unit root while the alternative hypothesis is that there is no unit root. The results Phillips Perron Test showed in the following tables.

Table 8. Phillips Perron Test: On Level

	None	With intercept	Intercept and trend
Tax revenue (US$)	(1.969913)	(-0.577302)	(-2.206786)
Gross fixed capital formation	(-0.455924)	(-5.217423) ***	(-5.126671) ***
Grants	(-1.082458)	(-3.721748) ***	(-3.418825) *
GDP per capita	(1.899363)	(-0.517300)	(-2.169057)
Gross Debt	(0.257786)	(-1.973659)	(-1.944831)
Consumer price   index	(7.476973)	(0.558412)	(-1.009354)

 

	None	With intercept	Intercept and trend
Tax revenue (US$)	(-5.440539) ***	(-6.364507) ***	(-6.371048) ***
Gross fixed capital formation	(-12.66594) ***	(-12.27816) ***	(-13.82240) ***
Grants	(-4.176903) ***	(-4.161142) ***	(-4.149632) *
GDP per capita	(-3.079132) ***	(-3.740176) ***	(-3.698393) **
Gross Debt	(-3.027537) ***	(-2.977647) **	(-2.903783) *
Consumer price   index	(-1.799383) *	(-3.171270) **	(-3.186618) *

 

The previous tables showed that the PP test also confirmed that the included variables are stationary after first difference I (1)

5.2  Estimate ARDL and ECM

According to the research “Determinants of Tax Revenue Efforts in Developing Countries” ⁴⁶ The equation of our ARDL model is:

𝑇𝑎𝑥_𝑡 = 𝛽₀ + 𝛽₁𝑡𝑎𝑥_𝑡−1 + 𝛽₂𝑣𝑎𝑡_𝑡 + 𝛽₃𝑑𝑒𝑏𝑡_𝑡 + 𝛽₄𝑔𝑟_𝑡 + 𝛽₅𝑐𝑝𝑖_𝑡 + 𝜇_𝑡

The null hypothesis of no cointegration is that H0: β1 = … = β5 = 0, and the alternative that cointegration exists is: H1: at least one parameter not equal to zero, it’s performed by Wald test using F-test. The probability of error correction term is significant, so we will reject the null hypothesis and there is a long run relationship and cointigration ⁴⁷.

⁴⁶ Abhijit Sen Gupta, IMF Working Study, Determinants of Tax Revenue Efforts in Developing Countries, Authorized for distribution by Cyrille Briançon, July 2007.

⁴⁷ We Used more than one specification using the same variables to account for possible multicollinearity

Since there is a long-run relationship is existing, then the conditional autoregressive distributed lag model will be conducted that can be used to estimate the long-run coefficients, by the long run equation:

𝑇𝑎𝑥_𝑡 = 𝛽₀ + 𝛽₁𝑣𝑎𝑡_𝑡 + 𝛽₂𝑑𝑒𝑏𝑡_𝑡 + 𝛽₃𝑔𝑟_𝑡 + 𝛽₄𝑐𝑝𝑖_𝑡 + 𝜇_𝑡

Table (5) represents estimating 7 models for the equation by ARDL method, the lag of tax revenue is statistically significant in the model (7), also VAT and CPI are statistically significant at 5% level of confidence. While public debt and grants are non-significant. So VAT and CPI effect on tax revenues. Table (6) Illustrates 7 models for the equation by using cointegration and long run form method and showing that VAT and CPI are statistically significant at 5% level of confidence and effect on tax revenues on the long run.

The error correction term (ECT) is statistically significant, less than one and negative, and its value is -0.441234. The estimating ARDL model with automatic lag selection using E-views version nine is ARDL (1,0) model, it was selected depending on the least AIC, as shown in figure(1)⁴⁸.

⁴⁸ See the appendix

Table 10. The results of estimation by ARDL method using E-views version nine

Regressors	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6	Model 7
Tax revenue (-	0.567081	0.596002	0.351381	0.351722	0.363001	0.374266	0.558766
1)	(3.355037)***	(3.514153)***	(1.668530)	(1.631181)	(1.729629)*	(1.816467)	(3.494164)***
GDP per capita	0.496688	0.458278	0.499542	0.499954	0.365633	0.313536
	(2.481659)**	(2.275824)**	(2.572058)**	(2.508412)**	(1.482550)	(1.385406)
Change in		0.421604	0.412267	0.412879	0.397561	0.356676
GFCF		(1.178896)	(1.203265)	(1.176126)	(1.141157)	(1.060465)
CPI			0.185756	0.184826	0.344700	0.361998	0.460998
			(1.825650)*	(1.621532)	(2.172709)**	(2.356511)**	(2.956470)***
Public debt					0.091687		-0.032967
					(0.577346)		(0.199771)
Grants				-0.000889			0.001798
				(0.019792)			(0.036003)
VAT					-0.083247	-0.084944	-0.135032
					(1.450879)	(1.503428)	(2.570105)**
R-squared	0.959015	0.961095	0.965671	0.965672	0.969074	0.968626	0.964397
F-statistic	315.8897	214.0967	175.8141	135.0275	120.1200	148.1938	130.0197
No.observations	30	30	30	30	30	30	30

(***significant at 1% – ** significant at 5% – * significant at 10%)

Table 11. The results of estimation by ARDL cointegrating and long run using E-views version nine

 

Regressors		Model 1	Model 2	Model 3	Model 4	Model 5	Model 6	Model 7
GDP	Cointegrating	0.496688	0.458278	0.499542	0.499954	0.365633	0.313536
per	form	(2.481659)**	(2.275824)**	(2.572058)**	(2.508412)**	(1.482550)	(1.385406)
capita	Long run	1.147302	1.134355	0.770163	0.771203	0.573993	0.501068
	coefficient	(10.756479)***	(9.923391)***	(4.492050)***	(4.218455)***	(2.000973)	(1.874005)*
Change	Cointegrating		0.421604	0.412267	0.412879	0.397561	0.356676
in	form		(1.178896)	(1.203265)	(1.176126)	(1.141157)	(1.060465)
GFCF	Long run		1.043578	0.635607	0.636886	0.624115	0.570013
	coefficient		(1.000610)	(1.077428)	(1.050868)	(1.037771)	(0.968038)
CPI	Cointegrating			0.185756	0.184826	0.344700	0.361998	0.460998
	form			(1.825650)*	(1.621532)	(2.172709)**	(2.356511)**	(2.956470)***
	Long run			0.286387	0.285103	0.541131	0.578517	1.044791
	coefficient			(2.362679)**	(2.039616)*	(2.127998)**	(2.296213)**	(7.626168)***
Public	Cointegrating					0.091687		-0.032967
debt	form					(0.577346)		(0.199771)
	Long run					0.143936		-0.074715
	coefficient					(0.577111)		(0.203755)
Grants	Cointegrating				-0.000889			0.001798
	form				(0.019792)			(0.036003)
	Long run				-0.001372			0.004075
	coefficient				(0.019781)			(0.036119)
VAT	Cointegrating					-0.083247	-0.084944	-0.135032
	form					(1.450879)	(1.503428)	(2.570105)**
	Long run					-0.130686	-0.135751	-0.306031
	coefficient					(1.270898)	(1.309451)	(2.390636)**

(***significant at 1% – ** significant at 5% – * significant at 10%)

5.3  Diagnostics Tests

5.3.1 Checking serial correlation and Heteroscedasticity

 

The LM test, which is frequently employed to examine serial correlation of the residuals, is applied, and it is determined that there is no serial correlation between the residuals. Table 13 demonstrates that at level 0.05, the null hypothesis that there is no serial correlation is not rejected, indicating that there is no serial correlation in the estimated model’s residuals term. Additionally, the heteroscedasticity of the residuals was examined using the ARCH and Breusch-Pagan-Godfrey tests. The results demonstrate that there is no heteroscedasticity (or that the variance is constant) since the null hypothesis of no heteroscedasticity is not rejected at level 0.05.

Table 12. Diagnostics Tests

Test	Chi-squared value	p-value
Lagrange Multiplier (LM) for Serial Correlation	9.151799	0.6103
Breusch-Pagan- Godfrey for Heteroskedasticity	10.48978	0.1625
ARCH test	0.335965	0.5622

 

5.3.2 Checking Normality

The Jarque-Bera (JB) test is used to determine whether the residuals are normally distributed or not. The probability (p-value) of the test showed that the null hypothesis is not rejected so suggests that the residuals are normally distributed.

Figure 4. Normality Diagram and Jarque-Bera Test

5.4  Checking stability

Before creating a forecast, a model’s stability and accuracy must also be verified. This verification process is divided into two steps: verifying the model’s stability and performing a residuals performance diagnostic. CUSUM is used to verify the stability and accuracy of the model.

Figure 5. CUSUM Stability Test of ARDL (1,0,0,0,0,0) model

Figure 6. CUSUM of Squares Test of ARDL (1,0,0,0,0,0) model

 Because the plots of the CUSUM and CUSUMSQ statistics lie within the critical bands of the 5% confidence intervals of parameter stability, the results of the CUSUM and CUSUMSQ tests show that there is no instability of the coefficients.

6-  Conclusion

This study attempted to illustrate the effect of value added tax on public revenues in Egypt during the period (1990-2020) by using the ARDL model and ECM. In addition to the ARDL cointegrating and long run form model that demonstrated the long term and short term effects.

The study concluded that the value added tax negatively affects public revenues in the short and long term, and the value of ECT is -0.441234. There were results of some studies consistent with this conclusion such as: the study of (Christian Ebeke & Helene Ehrhart, 2011) showed that there was a negative and significant effect of the presence of VAT on tax revenue volatility. And the study of (Kaisa Alavuotunki, Mika Haapanen & Jukka Pirttilä, 2019) concluded that the revenue consequences of the VAT have not been positive. In contrast, there were other studies in consistent with this result: the study of (Renyan Mu, Fentaw N.M & Zhang L,2022), it assured that VAT audit, tax education, tax resource, and tax rate positively and significantly influence the dependent variable tax revenue performance. And the study of (Olawale Luqman, 2014) showed that that there was a significant relationship between value added tax and consolidated revenue generation in Nigeria at 5% level of significance.

This negative impact of the value-added tax on revenues is caused by the fact that Egypt exempts a number of small-sized companies whose sales of goods and services are less than 500 thousand pounds, and some retailers from value-added tax, and some service companies whose outputs are difficult to price, which reduces the taxable segment and increased the burden of tax on others.

In addition, Egypt is one of the developing countries that suffers from the lack of accounting records and financial fragility, as the value-added tax requires sellers and buyers to register every financial transaction, which is difficult to achieve with the tax system in Egypt. Also, for social purposes, some basic commodities are subject to zero value-added tax rate, which makes the value-added tax less regressive than it should be.

Therefore, it is recommended to policy makers in Egypt:-

• To work on improving the tax system in Egypt to suit the value-added

• That a value-added tax be applied at a low rate on essential commodities instead of a zero
• If Egypt cannot reach a level of efficiency and transparency in recording financial transactions for all goods and services subject to value-added tax, then it can apply a simpler type of sales tax that does not need this amount of In some of the more advanced developing countries, it could be the retail sales tax. A true competitor to VAT.

Through the findings of the study, and for more accurate research, this study recommends the study to examine several developing countries that applied value- added tax and compare the results in each of them and between them and countries that do not apply value-added tax. A comparison between the developed and developing countries that apply the tax to find out what is lacking in those developing countries in order to reach positive results by applying the value-added tax. In addition, the study can use a more accurate indicator to measure the value- added tax, as this study used a simple indicator through the dummy variable. A longer period of time can also be used, as this research suffers from the short period of tax application in Egypt and the lack of data as well.

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