Factors Affecting Tax Collection in Pakistan: An Empirical Investigation

Abstract Tax is a financial charge imposed on individuals by state in different forms like direct tax paid directly by individuals, indirect tax collected by intermediaries and deposited to Government like sales tax. Taxation plays an important role in the process of revenue generation and to run various activities in an economy. The study empirically demonstrates various factors involved in direct and indirect tax collection in Pakistan. Tax to GDP ratio, corruption, political instability, trade openness, real per capita income and inflation were considered main factors affecting tax collection in empirical testing. Corruption and political instability were measured by using corruption index and political instability index respectively. Time series data from 1980-2010 was used for regression analysis. Data of all variables was obtained from International Country Risk Guide (ICRG), Handbook of Statistics and Polity to Project IMF. Augmented Dickey Fuller (ADF) test was applied to check the stationarity of all variables. Autoregressive Distributed Lagged (ARDL) model was applied to find out long run and short run dynamics of models. The results indicated tax collection shrinks due to increasing corruption, inflation and political instability while trade openness and real per capita income boost tax revenues. The study suggested important policy implication for increasing tax collection in Pakistan.