Buoyancy and Elasticity in SAARC Economies: Insights from Panel Analysis

Abstract

Since taxes are the foundation of an economy, an efficient tax system is essential to its continued existence. Revenue generation depends on effective taxation, which is measured by the tax system's elasticity and buoyancy. Using the data from 1991 to 2023, the tax buoyancy of a few South Asian Association for Regional Cooperation (SAARC) countries—Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka—are examined in this work. The estimation of coefficients has been done using the pool least square approach. Gross Domestic Product (GDP) has been used as an explanatory variable to assess the buoyancy of the four components of taxes and total Tax. Although the buoyancy coefficients for Value Added Tax (VAT) and customs duties are statistically significant, they have coefficient values below 1, i.e. -3.49 and 0.21, respectively, indicating that they are ineffective automatic stabilizers for the chosen time frame. As a result, the government feels inflexible when it comes to implementing value-added Tax as a source of collecting revenue. On the other hand, income tax and sales tax are good automatic stabilizers, as they have a positive and significant link with GDP, as shown by the coefficient values of 6.95 and 6.1, which are bigger than 1. Income and sales tax rank highest among all revenue-generating levies, indicating that South Asian nations choose a progressive tax structure. However, the entire tax structure in South Asia is geared towards proportional adaptation and requires strict control to be strengthened. Policy lesson suggests that a better domestic tax system can aid in increasing revenue collection through taxes since the World Bank, International Monetary Fund (IMF), and World Trade Organization (WTO) discourage excise and customs duties.