ABSTRACT
Rwanda is working tirelessly to achieve economic growth
and development. Taxation effective is the one tool to promote and to
accelerate economic growth and development, several studies analyses the impact
of tax on economic growth and economic development.
The objective of this study is to investigate the impact
of tax revenue on economic growth in Rwanda from 2007-2017. Secondary data were
sourced from Rwanda Revenue Authority (RRA) and National Institute of
statistics of Rwanda (NISR) for the period spanning from 2007Q1-2017Q4.
Descriptive data analysis was used and the variable considered here are: Gross
domestic product (GDP) as proxy for economic growth, direct tax (DT), Tax on
goods and services (TGS) and Tax on international trade and transaction (TITT).
Significant literature review for this study is available.
The results of the unit root and the co-integration tests
revealed that all variables are integrated of order one, I(1) and Johensen
cointegration test indicate existence of a long-run equilibrium relationship
among variables included in the model and we use also Vector Error Correction
Model (VECM) estimation method for data analysis to estimate for short run
result. The empirical findings showed that direct tax(DT)and tax on goods and
services(TGS) variables have positive at 0.1631 to 0.60 31 respectively impact
on economic growth, while Tax on international trade and transactions(TITT)
variable has negative at -0.005913 and it impacts on economic growth.
This study recommends that the policymakers within
government of Rwanda must improve both direct tax and tax on goods and services
(domestic tax) and increase Taxes on international trade transactions (customs
duties), it will harm economic growth of Rwanda therefore custom duties must be
rationally reduced or abolished and free trade zones like
Africa continental free trade area (AfCFTA) must create to foster increased
exchange of goods and services across borders.
Key Words: Tax Revenue, economic
growth, Gross domestic product, direct tax, tax on goods and services, tax on
international trade and transaction, VECM, Rwanda.
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CHAPTER-1 INTRODUCTION
1.1. BACKGROUND OF STUDY
Rwanda embraced economic growth, the power of any country in
economic growth and development is mainly depends on level of amount of tax
revenue generated to make economy more advanced.
Bruce et al (2006) point out that generating sufficient
revenue to finance government service delivery is the most important function
of a tax system. The government has to provide many goods and services to its
citizens such as health, education, and defense of the country, maintenance of
law and order and management of the economy.
Mustafa (2000) observes that as the economy grows, more people
and companies derive higher income and would therefore be liable to pay higher
taxes. Tax elasticity is an indicator of measuring the efficiency and
responsiveness of tax revenue mobilization in response to growth in the tax
base, GDP or national income. A tax is said to be elastic if tax revenues
increases more than proportionately in response to a rise in the tax base. If
the tax revenue shows less responsiveness to tax base, that type of tax base
fails to generate enough revenue for the government in the long run.
In line with its mandate of assessing, collecting, and
accounting for tax, customs and other specified non tax revenues, assisting
taxpayers in understanding and meeting their tax obligations thus raising their
compliance, Rwanda Revenue Authority also analyses long-term tax elasticity of
tax in relation to changes in GDP in order to highlight tax gaps within a
sector .
It is also in this framework that profitability benchmarking
based on business activities has to be done in order to identify areas of
irregularities in tax compliance hence taking actions for tax collection
optimization.
According to Azubike (2009), tax is a major player in every
society of the world.Taxation is most way to reduce foreign aid by mobilizing
internal government resource which lead to favorable conductive environment
which lead to economic growth promotion.
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Nzotta (2007) argues that taxes constitute key sources of
revenue to the federation account shared by the federal, state and local
governments.
That is why taxation system in Rwanda is divided into
decentralized tax and fiscal tax and others administrative fees from Rwanda
online known as Irembo.
Oxford Dictionary of Accounting (1995) defined taxation as a
levy on an individual or corporate body by the central or local government to
finance the expenditure of that government and also as a means of implementing
its fiscal policy.
Abomaye-Nimenibo(2017) is of the view that tax is a compulsory
contributions made by animate and inanimate beings to government being a higher
authority either directly or indirectly to fund its various activities and any
refusal is meted with appropriate punishment. He went on to say that Tax is an
involuntary payment made by a resident of a state in obeisance to levy imposed
by a constituted authority of a sovereign state at a particular period of time;
and that Taxation is the process put in place by government (which ever tier)
to exercise authority on and over the imposition and collection of taxes based
on enacted tax laws with which projects are financed. Taxation is therefore
seen as the transfer of resources as income from the private sector to the
public sector for its utilization to achieve some if not all the nation's
economic and social goals such as provision of basic amenities, social
services, educational facilities, public health, transportation, capital
formation etc.
However ,one of main function of government is to
infrastructure service development generation such as roads, schools, hospitals
,defense, pipe-borne water,... as well as ensure the rise of per capita income
and to achieve other macroeconomic factors such low unemployment, inflation,
Balanced of problem balance ,Economic growth, to reduce income inequality,..
For above service and argument to be efficient at optimum
level, government need sufficient resource to finance them. The task of
financing government expenditure and allocating national resource is main
responsibilities and challenges due to limited government resources .therefore
individuals, companies and government body must provide tax based on Rwanda
taxation law. Government always think how to modernized tax revenue by
reforming law . These law aim to ensure to promote tax compliance and to
discourage tax evasion and tax
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avoidance. The purpose of this study is to show the impact of
aid on economic development of Rwanda
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