FACULTY OF COMMERCE

DEPARTMENT OF FINANCE (FISCAL

STUDIES)
Evaluating the efficiency of VAT in the Zimbabwean multicurrency economy: (2009-

2014).

NAME: RINGISAI RUNYOWA R

REGISTRATION NUMBER: P0114367L

SUPERVISOR`S NAME: MR. NYANGARA

BULAWAYO

APRIL 2015

This Research Proposal is submitted in partial fulfilment for the award of Bachelor of
Commerce Honours Degree in Fiscal Studies Programme.
 RELEASE FORM

Student Name: RINGISAI RUNYOWA .R. (P0114367L)

Title of Project: Evaluating the efficiency of VAT in the Zimbabwean multicurrency

economy: (2009 - 2014).

Program: Bachelor of Commerce Honours Degree in Fiscal Studies.

Year of Award: 2015

All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording and or otherwise without the prior written permission of the
publisher. Permission is hereby given to the National University of Science and
Technology to produce single copies of this dissertation and to lend or sell such copies for
private, scholarly, or scientific research purpose only.

Signed:

Permanent Address: 15722 Kuwadzana Extension

P O Box Dzivarasekwa

Harare

2
 APPROVAL FORM

The undersigned certify that they have read and recommended acceptance, to the National
University of Science and Technology (NUST), a project entitled, Evaluating the
efficiency of VAT in the Zimbabwean multicurrency economy: (2009 - 2014)., submitted
by RINGISAI RUNYOWA .R., Student Number: P0114367L in partial fulfilment of the
requirements for the Bachelor of Commerce Honours Degree in Fiscal Studies

................................................................................................................/.........../........../........

Supervisor Date

.............................................................................................................../............/........../........

Chairperson Date

................................................................................................................/............/.........../......

External Examiner Date

3
 DEDICATION

To my late parents Mr and Mrs Runyowa.

4
 ABSTRACT

This study examined the efficiency of VAT in a multicurrency economy on the basis of
estimates of tax buoyancy using monthly time series data for the period 2009-2014 using
a multiplicative tax revenue function that focused on VAT and PAYE. An effective tax
system is not only central in promoting economic growth but is also crucial for the
achievement of macroeconomic objectives. This is recognised to be of supreme
importance when the country is facing severe financial challenges at the back of
continued fiscal deficits. The study utilised secondary data obtained from ZIMRA. ADF
test was done to detect non stationarity and serial correlation was done to detect normality
of data used. The study found that VAT and PAYE were buoyant meaning they were
efficient. This is reflected by the buoyancy coefficients of more than unit (1). A buoyant
tax structure is proper in a developing economy, since it suggests that tax collections will
grow automatically with the growing economy without resorting to frequent potentially
sensitive discretionary changes in tax structure. The study recommends expansion of the
tax base, expansionary fiscal policies, investor friendly policies and reducing the number
of VAT exemptions and zero rated supplies so as to improve tax revenue generation.

5
 ACKNOWLEDGEMENTS

I would like to express my profound gratitude to the departmental staff for their valuable
support throughout the duration of this course. Special mention goes to my supervisor Mr
Nyangara for his expert guidance. I also thank my fellow students who gave me courage
and hope.

Finally, I sincerely thank my family members who supported me financially and always
kept my morale very high. Above all, I give total honour to the Almighty God for without
His mercy this project could not have succeeded (Luke 1:37).

TABLE OF CONTENTS

6
RELEASE FORM................................................................................................................ii

APPROVAL FORM............................................................................................................iii

DEDICATION....................................................................................................................iv

ABSTRACT.........................................................................................................................v

ACKNOWLEDGEMENTS................................................................................................vi

TABLE OF CONTENTS...................................................................................................vii

LIST OF TABLES.............................................................................................................xii

LIST OF FIGURES...........................................................................................................xii

LIST OF ABBREVIATIONS AND ACRONYMS...........................................................xiii

1.9 Definition of Key Terms.........................................................................................xiii

LIST OF APPENDICES...................................................................................................xiv

CHAPTER I.........................................................................................................................1

INTRODUCTION................................................................................................................1

1.0 Introduction................................................................................................................1

1.1 Background to the Study............................................................................................1

1.1.1 General Overview of VAT in Zimbabwe.............................................................4

1.2 Statement of the Research Problem...........................................................................4

1.3 Research Objectives...................................................................................................5

1.3.1 Main Objective....................................................................................................5

1.3.2 Sub-Objectives....................................................................................................5

1.3.3 Research Questions.............................................................................................5

1.4 Statement of Hypotheses............................................................................................5

1.5 Justification of the Study............................................................................................5

1.6 Scope of the Study.....................................................................................................6

1.7 Limitation to the Study...............................................................................................7

7
 1.8 Chapter Summary.......................................................................................................7

CHAPTER II........................................................................................................................8

LITERATURE REVIEW.....................................................................................................8

2.0 Introduction................................................................................................................8

2.1 Theoretical Literature.................................................................................................8

2.2 Definition of VAT.......................................................................................................9

2.2.1 VAT Performance..............................................................................................10

2.2.2 Collection Efficiency.........................................................................................10

2.2.3 Tax Buoyancy....................................................................................................10

2.3 Efficiency of VAT Collections..................................................................................11

2.3.1 Buoyancy of VAT Revenue...............................................................................12

2.3.2 Relationship of VAT to Imports and Exemptions..............................................12

2.3.3 VAT Efficiency and Economic Growth.............................................................12

2.3.4 Incidence of VAT...............................................................................................14

2.3.5 VAT Gap............................................................................................................14

2.3.5.1 Methodologies of VAT Gap............................................................................15

2.3.6 VAT in Developing Countries...........................................................................16

2.3.7 Tax Revenue Productivity and Deficits.............................................................17

2.3.8 VAT Performance Methodologies.....................................................................18

2.4 Empirical Literature.................................................................................................18

2.5 Chapter Summary.....................................................................................................22

CHAPTER III.....................................................................................................................23

RESEARCH METHODOLOGY.......................................................................................23

3.0 Introduction..............................................................................................................23

3.1 Research Philosophy................................................................................................23

8
 3.2 Research Design.......................................................................................................23

3.3 Research Method......................................................................................................24

3.4 Estimating Regression Models.................................................................................25

3.4.1 Tax Buoyancy Estimation.................................................................................25

3.4.2 Estimation Procedure........................................................................................26

3.4.3 GDP Frequency Conversion..............................................................................26

3.4.4 VAT Efficiency with Respect to Other Variables..............................................26

3.2.5 Computation of Raw Data.................................................................................27

3.5 Data Collection Procedure.......................................................................................27

3.5.1 Secondary Data and Justification......................................................................27

3.5.2 Types and Sources of Data................................................................................27

3.6 Time Series Data Analysis.......................................................................................28

3.6.1 Descriptive Statistics.........................................................................................28

3.6.2 Diagnostic Tests and Model Estimation............................................................28

3.6.3 Time Series Regression.....................................................................................29

3.6.4 Testing for Research Hypotheses......................................................................30

3.7 Data Presentation and Analysis Procedures.............................................................31

3.8 Chapter Summary.....................................................................................................31

CHAPTER IV....................................................................................................................32

DATA PRESENTATION, ANALYSIS AND DISCUSSION OF RESULTS....................32

4.0 Introduction..............................................................................................................32

4.1 Diagnostic Test Results............................................................................................32

4.2 Stationarity Test Results...........................................................................................33

4.3 Descriptive Results...................................................................................................34

4.4 Regression Results...................................................................................................34

9
 4.5 VAT Gap Analysis....................................................................................................35

4.5.1 Trends in VAT Collections................................................................................36

4.6 Interpretation of Research Findings.........................................................................37

4.7 Discussion of Findings.............................................................................................38

4.8 Chapter Summary.....................................................................................................39

CHAPTER V......................................................................................................................40

CONCLUSIONS AND RECOMMENDATIONS.............................................................40

5.0 Introduction..............................................................................................................40

5.1 Summary of Key Findings.......................................................................................40

5.2 Conclusions..............................................................................................................41

5.2.1 Zimbabwes VAT Collection System is Efficient..............................................41

5.2.2 Zimbabwes PAYE is Efficient more than VAT................................................41

5.2.3 Existence of a Positive Relationship between VAT and Imports......................41

5.2.4 VAT Gap Showed Efficient Collection System.................................................42

5.2.5 Existence of a Negative Relationship between PAYE and Exports..................42

5.2.6 Hypotheses Adopted..........................................................................................42

5.3 Recommendations....................................................................................................42

5.3.1 Effective Policy Framework..............................................................................43

5.3.2 Strengthening Capacity of ZIMRA...................................................................43

5.3.3 Operational Efficiency of ZIMRA....................................................................43

5.3.4 Tax Rate Increment and Reductions..................................................................44

5.3.5 Broadening the Tax Base...................................................................................44

5.4 Suggested Areas for Further Research.....................................................................44

5.5 Chapter Summary.....................................................................................................45

REFERENCES...................................................................................................................46

10
APPENDICES....................................................................................................................52

LIST OF TABLES

Table 1: Results of the Model Diagnostic Tests............................................................................

11
Table 2: ADF Unit Root Test Results...........................................................................................

Table 3: Summary of Descriptive Statistics..................................................................................

Table 4: VAT & PAYE Model Estimates.......................................................................................

Table 5: VAT Gap Computation....................................................................................................

LIST OF FIGURES

Figure 1: Proportion of VAT and PAYE to GDP (2009 2014).....................................................

Figure 2: Relationship between GDP and VAT.............................................................................

LIST OF ABBREVIATIONS AND ACRONYMS

ADF - Augmented Dickey-Fuller

12
AFRODAD - African Forum and Network on Debt and Development

BLUE - Best Linear Unbiased Estimates

CPI - Consumer Price Index

CLRM - Classical Linear Regression Model

EU - European Union

GDP - Gross Domestic Product

OLS - Ordinary Least Squares

PAYE - Pay As You Earn

RBZ - Reserve Bank of Zimbabwe

VAT - Value Added Tax

ZIMRA - Zimbabwe Revenue Authority

ZIMSTAT - Zimbabwe National Statistics Agency

Definition of Key Terms

VAT: The indirect tax levied on supply of goods and services. Its major characteristics are
that; it is a tax on consumption, it is a multi-stage tax and it is charged on value added.

Buoyancy: The responsiveness of tax revenue to changes in income with no attempt to

control for discretionary changes in policy (Singer 1968).

Efficiency: The proportion of usefulness of a tax head revenue to changes in income

(Chelliah et al 1975).

Registered Operator: A person who is registered for VAT with ZIMRA. VAT is only
chargeable by registered operators, who then will account for the VAT charged and
collected on due dates specified by the revenue authority.

Exemption: Tax is not charged on outputs, tax paid on inputs cannot be reclaimed.

LIST OF APPENDICES

13
Appendix 1: Augmented Dickey Fuller Results...........................................................................

Appendix 2: Buoyancy Model Results.........................................................................................

Appendix 3: Relationship of VAT, PAYE and Consumer Price Index..........................................

Appendix 4: Serial Correniality Tests...........................................................................................

Appendix 5: Normality Tests........................................................................................................

Appendix 6: VAT versus Imports - Model Results.......................................................................

Appendix 7: PAYE versus Exports - Model Results....................................................................

14
 CHAPTER I

INTRODUCTION

1.0 Introduction

This chapter introduce the research and provides a brief background to the study,
highlights the problem which the study seeks to correct. The main purpose of the study,
research questions aimed at achieving the objectives and assumptions under which the
study is conducted are explained. It forms the research context, note some limitations and
demonstrates the significance of the study.

1.1 Background to the Study

Taxation is the most important tool for domestic resource mobilization at the disposal of
governments in developing countries (AFRODAD 2012). If well designed, taxation can
be a good instrument for obtaining optimal fiscal policy as well as economic growth and
development. However, empirical evidence shows that many countries are far away from
implementing appropriate and optimal tax policies (Twerefou et.al 2010). This is partly
reflected by the magnitude of fiscal deficits that governments have to bear with at the
back of continuously increasing expenditure programmes (Okech and Mburu 2011).

Zimbabwe like many developing countries in Africa is renowned for budget deficits
which have persisted over the years. The imbalance between government revenue and
expenditure resulted in persistent fiscal deficits. Most developing countries are finding it
difficult to raise enough tax revenues to spearhead their developmental aspirations. This
has been somewhat attributed to the incapacitation of the tax system to generate sufficient
revenue to finance public expenditure. Moreover, the existence of large informal sectors
make it particularly difficult to trace and capitalise on potential tax sources. This is further

15
constrained by weak tax administrations and poor governance to enforce tax compliance.
Zimbabwe is not an exception as taxes are a critical source of government revenue.

Remarkably, the country has implemented a number of tax reforms in a bid to raise the
revenue mobilization capacity of the tax system. Unfortunately, very little is known about
the revenue mobilization capacity of the tax system. This study seeks to evaluate the
efficiency of VAT in Zimbabwe through the application of the concept of tax buoyancy.
The application of this concept will help us to find out whether the tax structure ensures
that revenue grows faster than national income as required by the growth in expenditure.

In other words, the tax policy has to ensure that every tax sources yield is responsive to
national income changes and that predominant taxes in the revenue are those with a
highly elastic yield with respect to national income. If these attributes feature in a tax
system, then the tax weapon can be applied to mitigate the dangers of perpetual
fiscal imbalances (Muriithi and Moyi 2003).

In addition, Blinder and Solow (1973) suggest that inadequacy of tax revenue to finance
public expenditure has largely been attributed to lack of responsiveness of tax revenue to
changes in national income. The existing budget deficits in many developing countries
suggest that the tax systems are not revenue productive. Some may overlook this and
attribute the cause of deficits to excessive spending or temporary adverse economic
conditions (Osoro 1993). The importance of taxation as a tool for stimulating economic
growth and development depends on the design of a proper tax system which is efficient
and effective (Oriakhi and Osemwengie 2013).

In a move to enhance transparency and accountability in 2001, the government set up the
Zimbabwe Revenue Authority (ZIMRA) whose mandate is to administer and collect
revenue on behalf of the government. Value Added Taxation (VAT) was enacted in the
year 2004 to replace sales tax as one of the instruments of the global economy that was
widely accepted and implemented in most countries.

VAT brought within its scope a wider range of goods and services supplied by registered
operators in Zimbabwe which could be taxed. Sales tax was previously flawed because it

16
had a number of complications in terms of its tax codes and tax bases. For instance, its
reforms began in 1985 with an increase in the general sales tax rate from 10% to 20% and
subsequently to 25% in the same year. Four years down the line, there was further unrest
with the rate being revised downwards initially from 25% to 22.5% and finally to 17.5%.
Currently VAT is packed at 15% on all goods and services produced within the countrys
borders. In the year 2008, ZIMRA had to carry out some intensive audit and
investigations to ensure compliance. Nonetheless, tax revenues remained subdued causing
a great concern to policymakers. Figure 1 below shows the proportion of Zimbabwean
VAT and PAYE to GDP:

Figure 1: Proportion of VAT and PAYE to GDP (2009 2014).

TAX HEAD PERFOMANCE

1,600,000,000.00
1,400,000,000.00
1,200,000,000.00
1,000,000,000.00

TAX HEAD COLLECTIONS

GDP (000) 800,000,000.00 P.A.Y.E VAT
600,000,000.00
400,000,000.00
200,000,000.00
-
2008 2009 2010 2011 2012 2013 2014 2015

YEAR

Source: Authors Computations

The contribution of VAT to GDP fluctuated between $200 million and $1.39 billion from
2009 to 2014 with an all-time high in 2011, the lowest being $300 million in 2009. On the
other hand, PAYE as a proportion of GDP has been below that of VAT across the study
period, fluctuating between $150 million and $1 billion. VAT, from 2011 is declining with
PAYE continuously rising. Nevertheless, these figures show that VAT and PAYE are
really crucial sources of government revenue although there has been a notable decrease

17
in the proportion of VAT to GDP in the post Zimbabwean dollar era emanating from the
harsh economic environment.

1.1.1 General Overview of VAT in Zimbabwe

In Zimbabwe VAT is administered under the Value Added Tax Act (Chapter 23:12) and its
Regulations. It is a type of consumption tax that is placed on a product whenever value is
added at a stage of production and at final stage or charged on the supply of services. It is
also levied on the importation of goods and certain services. According to (Laure 1956),
VAT is an indirect tax levied on the supply of goods and services. The VAT paid is called
input tax and VAT charged is called output tax. VAT is accounted for at every point in the
chain of supply that is in every transaction.

VAT is levied or charged mainly by registered operators and any other person who is
required to do so in terms of the Value Added Tax Act and Value Added Tax Regulations.
VAT payable to the Zimbabwe Revenue Authority is established by finding the difference
between Output tax and Input tax under the invoice or credit method. The invoice credit
method was agreed to be used for several reasons notably that by explicitly linking the tax
credit on the purchasers inputs to the tax remitted by the supplier of those inputs, it
discourages fraudulent undervaluation of intermediate sales.

1.2 Statement of the Research Problem

Budget deficits have been a permanent feature of Zimbabwe (Lambert and Suckling
1986). The country has never had a budget surplus and fiscal deficits have been
cumulatively responsible for the countrys debt. This is a challenge to the Government of
Zimbabwe as it is left with limited flexibility in terms of resource mobilisation.
Meanwhile, ZIMRA revenue collection against targets has always showed a positive
variance since its inception with the exception of the year 2001 when there was a negative
1% variance. Despite everything, a weak and unproductive tax system impacts adversely
on a countrys developmental agenda as it limits the ability to spend on more
developmental projects and programmes.

18
1.3 Research Objectives

1.3.1 Main Objective

The overall objective of the study is to evaluate the efficiency of VAT in the
multicurrency economy.

1.3.2 Sub-Objectives

1. To examine the efficiency of VAT revenue against income growth.

2. To examine the relationship between VAT and PAYE.
3. To assess the link between VAT and Imports.
4. To analyse the VAT Gap.
5. To assess the relationship between PAYE and Exports.

1.3.3 Research Questions

1. How efficient is VAT revenue to income growth?

2. What is the relationship between VAT and PAYE?
3. What is the link between VAT and Imports?
4. How is VAT performing in terms of its Gap?
5. What is the relationship between PAYE and Exports?

1.4 Statement of Hypotheses

H: VAT is not efficient with respect to GDP

H: VAT is efficient with respect to GDP

1.5 Justification of the Study

Assessing the efficiency of a tax system is important not only because it allows one to
examine the responsiveness of the tax to its base but also because it enables tax planners
to alter the systems equity and efficiency effects (Amin 2000). This therefore enables tax
planners to ensure that a tax system has the capacity to generate revenue within a growing
economy without resorting to the politically difficult task of raising tax rates, a move that

19
may exploit the ordinary tax payer (Kusi 1998). Thus an effective tax system is not only
central in promoting economic growth but is also imperative in achieving macroeconomic
goals (Oriakhi and Osemwengie 2013).

This research brings in fresh and additional information on the subject of VAT. In the
recent years VAT and PAYE have become the most important sources of tax revenue in
Zimbabwe following the countrys increased reliance on imported products. The weights
of other tax sources such as corporate tax have declined with the growing informal
economy. Despite the increasing significance of VAT and PAYE, research on the
productivity of these tax sources remains limited. This study therefore seeks to bridge this
literature gap and to submit policy proposals that can improve the countrys tax
administrative capacity.

This research enhances knowledge and skills needed to carry out similar future intensive
research work. In addition it assists in reconciling theory and practical aspects, since the
work integrates theoretical aspects covered in academic studies such as value added tax,
public finance, taxation accounting, customs management theory and practice among
others. The study is important for the partial fulfilment of the accolade of Bachelor of
Commerce Honours degree in Fiscal studies to the researcher. In addition, the study
proves beneficial to a number of interested stakeholders ranging from students,
academics, tertiary institutions, practitioners, policy makers and the whole economy.

1.6 Scope of the Study

The research focused on the Zimbabwe Revenue Authority with particular reference to
VAT. The research covered the period January 2009 to December 2014. Literature from
both international and indigenous text was used.

20
1.7 Limitation to the Study

1. Most studies which examines the efficiency of VAT are over longer periods of
time. Nevertheless the six years considered does not severely hinder the
examination.
2. Information on tax heads over the period under review is very sensitive thus data
availability is difficult, but the researcher exercised due diligence to collect the
data.
3. Excessive bureaucracy on the part of ZIMRA delayed collection of data. However,
persuasion and patience yielded results.
4. GDP was collected on an annual basis but the available tax head data was on a
monthly basis. However, data frequency conversion was used to come up with
estimated monthly GDP.

1.8 Chapter Summary

The chapter provide the necessary introduction of the topic at hand giving a
comprehensive background. The next chapter concentrate on a review of the literature
available in theory and practice, while it carefully highlight the research gap.

21
 CHAPTER II

LITERATURE REVIEW

2.0 Introduction

This chapter provides with the most critical and important aspect of the investigation; it
discusses the literature of researches which are related to this investigation. It points out
what the knowledge base already has and highlights the knowledge gap in the topic area.
The chapter thoroughly examine the results of previous related researches, give a critique
of the reviewed literature and acknowledge the importance of the results in the
administration of VAT in Zimbabwe.

2.1 Theoretical Literature

In a recent study Adereti et al (2011) suggested that the main aim of VAT was to increase
the revenue base of government and make funds available for developmental purposes
that accelerate economic growth. The objective of taxation as summarised by (Lymer and
Oats 2010) and (Nightingale 2002);

a) Raising revenue to finance government expenditure.

b) Redistribution of income to promote the welfare and equality.
c) Regulation of the economy thus an enabling environment for business to thrive.

However, Lopez and Kadar (2001) postulated that taxation among the Organisation for
Economic Cooperation and Development (OECD) had uniformly been geared towards
efficiency, increased tax revenue, equity and enforceability.

22
2.2 Definition of VAT

According to Adesina et al (2011) VAT is a neutral tax on businesses in that it does not
represent a real cost to anyone but the end to consumers. He argued, everybody pays tax
to the Government whenever they purchase goods or services. Therefore it is a tax on
consumption that is the more a consumer buys the more tax they pay. Conversely,
Owolabi and Okwu (2011) described this tax as revenue collected for the government by
the supplier of those goods and services.

Jayakumar (2010) assumed that it is a type of indirect tax that is imposed on goods and
services which plays an important role in the economic development of a country by
influencing the rate of revenue accruable and consumption. On the other hand, VAT is a
regressive tax because in terms of the same consumption, people with lower income
spend a larger part of their income rather than those with higher income (Jenkins 2008).
Hence, it is a revenue generator. The added value is created in each phase of the
manufacturing process, so that each phase brings revenue to the state budget (Bendikien
and aparnis 2006). Similarly, Konteksteet et al (2006) suggested that VAT is introduced
at the beginning of manufacturing process and is counted in each phase of product or
service production and marketing until it reaches the consumer, who pays this tax.

In addition, it is a broad based business tax imposed at each stage of production and
distribution process typically designed to tax final household consumption (Tait et al
2005). The study of Aizenman et al (2005) agreed as it explained VAT as a tax system
applied on the percentages of the price of goods and services throughout the value
addition mechanism continuously on all goods and services with some exemption stated
under the law. Their conclusion was that VAT collects sufficient amounts of revenue
through lessening cost of their collection and easement of their administration. Likewise,
the study conducted by Bird (2005) revealed VAT as a cash machine tax which was
necessarily adopted by both developed and developing countries which allowed
governments to collect sufficient amount of revenue.

23
2.2.1 VAT Performance

According to the European Commission (2012) VAT performance is defined as the ratio
of actual VAT revenue to the revenue that would be raised if VAT were levied at the
standard rate on all consumption with perfect enforcement. They advanced that, this
measure has three important advantages. First, it is easy to calculate from readily
available data. Secondly, it provides a clearly understandable normative benchmark - a
uniform VAT imposed on all final consumption. Thirdly, as Keen (2011) discussed in
detail the gap between actual and potential revenues thus measured may be decomposed
in a number of useful ways. Such decomposition is important because while the c-
efficiency measure provides a good starting point, it is not in itself adequate to assess
either VAT compliance or administrative effort.

2.2.2 Collection Efficiency

The collection efficiency of VAT theory developed by Emran and Stiglitz (2005)
suggested that the collection efficiency is impacted by political economy considerations,
greater polarization and political instability which reduce the efficiency of the tax
collection. This theory defined VAT as the ratio of the VAT revenue to GDP divided by
the standard VAT rate. In contrast, Musgrave (1969) noted that the tax performance of a
developing country can be measured by the ability to give up approach, efficient
resource use approach, ability to collect approach, and comparison with average
performance. Going by these, VAT has no problems with the ability to give up and
collect approaches.

2.2.3 Tax Buoyancy

Twerefou et al (2008) advanced that two important measures that have been used to
assess the efficiency of any tax system in terms of its mobilization capacity are tax
buoyancy. It is defined as total response of tax revenue to changes in national income and
discretionary changes in tax policy over time. In addition, Le (2003) argued that generally
VAT performance is considered to be satisfactory if the buoyancy is greater than or equal

24
to one. Therefore, to this effect VAT collections keep up with the growth of the economy.
Thus Singer (1968) agreed with Twerefou by suggesting that Tax buoyancy measures the
responsiveness of tax revenue to changes in national income with no attempt to control
for discretionary changes in policy.

2.3 Efficiency of VAT Collections

VAT as a consumption tax is a function of income, policies in place to empower the

populace and increase their per capita income as propounded by Onaolapo and Fasina
(2013). In support, many studies were conducted by among them Unegbu et al (2011),
Wawire (2011) and Adereti et al (2011) on the contributions of VAT revenues to the
economy by using gross domestic product as macro level indicator both in developed and
developing countries. Contrastingly, Arguello (2011) asserted that the quick spread in the
adoption of the VAT in the developing world has been the result of the relative ease in the
collection of taxes at the cash registry compared to the self-motivation and honesty
required from agents to pay income taxes.

In cooperation Karingi et al (2005) and Moyi and Ronge (2006) contend that both tax
policy reforms and tax administration reforms, are crucial in making tax revenue
responsive to changes in national income which in the process enhances revenue
productivity. However, as noted by Amin (2000) assessing tax productivity is important
because it not only allows the examination of the responsiveness of the tax system but
also because it affects the systems equity and efficiency effects.

Tanzi and Davoodi (1997) also found empirical support for the relevance of demand
factors, they argued that the quality of institutions and governance influence tax revenue
through their contribution to tax evasion, improper tax exemption and weak
administration. The emphasis was buttressed by Musgrave (1989) who concurred stating
that high revenue productivity from a tax system is normally considered as one of the
criteria of a good tax system in developing countries.

25
2.3.1 Buoyancy of VAT Revenue

Odusola (2006) observed that government revenue at any given point in time is
influenced by the changes in tax policies, rate, base and incentives. Odusola believed that
these policies influences domestic savings, investments, consumption and expenditure. Le
(2003) suggested that the measurement of how productive a tax system can be is done by
the study of the tax buoyancy. However according to Amin (2000) the studies on the
productivity of the Zimbabwean tax system are few, limited in scope, coverage and
method of analysis adopted.

Asher (1989b) agreed with Odusola saying one criterion of a good tax system is high
revenue productivity. Moreover, Mansfield (1972) suggested that tax buoyancy is a
measure of the responsiveness of tax receipts to economic growth. A tax which is buoyant
is one whose revenues increase by more than one percent for a one percent increase in
national income or output. In measuring buoyancy, no attempt is made to control for
discretionary changes in the tax system or administration. Consequently, buoyancy
reflects both discretionary changes and automatic revenue growth. Prest (1962) argued
that for various reasons studies of tax responsiveness often focus on tax buoyancies rather
than tax elasticities. One problem is in obtaining information on discretionary revenue
changes.

2.3.2 Relationship of VAT to Imports and Exemptions

The coefficient of growth in imports is insignificant because growth of import affects

only the indirect tax like tariff, import duties and VAT however, in few countries
withholding income tax is imposed on imports but the proportion is very small Masood et
al (2010). On the issue of VAT exemptions, Thisen (2003) noted that many African
countries lack the administrative ability to handle the large volume of returns and refunds
for zero-rated transactions. Because of this, lots of items are exempted.

26
2.3.3 VAT Efficiency and Economic Growth

To Mohammad (2012) many VAT systems can be described as having a basic rate, special
rates for some goods and services and exemption status for certain economic activities or
specific goods and services. Furthermore, Supporters of these reforms point out that VAT
has proved to be a robust source of revenue in the majority of developing countries and as
a result it has improved the efficiency of the tax system (Arguello 2011).

Keen and Lockwood (2010) found that adoption of the VAT increases revenue to GDP by
4.5 percent in the long-run. Moreover, a one standard deviation increase in GDP per
Capita increases the tax efficiency by 8.1%. Qualitatively Gendron (2006) concurred by
positing that same results apply for another measure of VAT collection efficiency, defined
by the ratio of VAT revenue to GDP divided by the standard rate of VAT.

Masood et al. (2010) in their study which attempted to search the determinant of tax
buoyancy of 25 developing countries concluded that growth in import and manufacturing
sector have positive impact on growth of tax collection. Moreover, Golit (2008) suggested
that increase monetary growth also influence positively on tax collection because increase
in monetization cause documentation of transaction which improves tax buoyancy.

However, according to Bendikien and aparnis (2006) an increase in budget deficit has
positive influence on tax collection by demanding more resource mobilization from the
governments. More so, Thompton (1990) in his study on the impact of fiscal deficit on
economic growth, revealed that there is a positive relationship between fiscal deficit and
economic growth. However, Baily (1980), Feldstein (1980) and Landau (1983) in their
studies found a negative relationship between fiscal deficit financing and economic
growth.

In their paper Aizenman and Jinjarak (2005), they added the age of the VAT (years since
first implemented) to the regressions to capture how the maturity of the VAT may
influence its collection efficiency. The age of the VAT has an unexpected negative sign,
but it was insignificant and delivered essentially no explanatory power to the regressions

27
of VAT performance. Ebrill et al. (2001) on the other hand found weak support for the
role of VAT age in collection efficiency.

2.3.4 Incidence of VAT

According to Onaolapo and Fasina (2013) results obtained from elasticity of population
simply highlight the benefit inherent in high population. The negative coefficient obtained
simply indicates that relatively low population decrease VAT revenues. Thus, VAT is a
regressive tax because in terms of the same consumption people with lower income spend
a larger part of their income rather than those with higher income Jenkins (2008).
Margalioth and Reuven (2006) diverged and emphasised that consumption taxes are not
necessarily regressive as this is offset through a more progressive use of the tax revenue
generated from other sources, mostly through the expenditure side of the national budget.

Distinctly despite the enormous revenue that flows into the government treasury there are
critics who argues that the incidence of VAT like other indirect tax is regressive Adari
(1997), the reason is that poor people spend a large portion of their income on purchases
some of which carry VAT. However, the concern about the economic impact of VAT led
Shoup (1989) to argue that it is all the more important because it may cause consumers to
reduce their consumption of certain commodities that have direct or indirect effects on
labour productivity.

2.3.5 VAT Gap

According to Shome (2006) the difference between VAT due and total VAT collections is
often referred to as the VAT Gap. Therefore the VAT gap is typically expressed as the
percentage of net VAT due. One study suggests that the VAT Gap in the averaged about
twelve percent (EU 2006). However, the VAT gap among particular countries in the EU
varies greatly.

More so, Plumley (2005) states that the definition of the tax gap is divided into three
components. The failure to have a certain return, under reporting of income and
deductions also relevant exaggeration, failure to pay the full fee reported. With reference

28
to Agha and Haughton (1996) the key variables that determine the size of tax gap in a
country include the structure of the economy, the rule of law and tax morality. Therefore,
although tax gap is often associated with tax evasion and avoidance, a broader measure of
tax gap is simply non-compliance.

2.3.5.1 Methodologies of VAT Gap

Mohammad (2012) reasoned that the measurement of VAT gap is a difficult exercise.
Miller and Oats (2009) supported this assertion claiming the methodology adopted would
vary with factors such as the type of tax, the nature of the sector, class of taxpayers and
the quality of the information.

On the other hand, according to Zee (1988: p67) there are two main methods to measure a
countrys tax gap. One method involves the use of macroeconomic data to estimate the
aggregate value of transactions in the informal economy that has evaded taxation. He
further argued, it relies mainly on activities that leave some traces of their existence in
macroeconomic data.

Furthermore, Zee (1988: p89) although this method seems to be more popular, the
accuracy of its results should be treated with caution. It assumes that most underground
activities are taxable and are subject to the same elasticities as those in the formal
economy. As such, conflicting estimates are not uncommon. Chinwe (2013) highlighted
that miscalculations are more likely to occur when different deductions are involved or
when wrong VAT rates are applied. On the other hand, the alternative approach that is the
micro method involves the use of microeconomic data from different taxed sectors to
estimate the potential tax liabilities (Zee 1988: p67).

Conclusively, Bird (2005) noted that many developing countries have either vast
agricultural sectors or significant informal economic activities, the output from which
cannot be readily measured or taxed. As such the tax base as a proportion of the aggregate
economic activity in such countries may be relatively small compared to that in
developed countries.

29
2.3.6 VAT in Developing Countries

To meet economic growth objective countries must spend more on economic and social
infrastructures which can only be achieved through improvement in tax efforts to realize
the required level of public expenditure Golit (2008). On the other hand, according to
Ariyo (1993) VAT rate in Nigeria has been determined in a way that minimizes
disincentive effects on economic activities. The effects of low tax effort in Nigeria have
been strengthened by the VAT system.

Piggott and Whalley (2001) account for the effect that VAT has on agents' decisions to
operate in the informal sector and found that welfare is reduced when its base is
expanded. Contrastingly, Emran and Stiglitz (2005: p112) gave a model which explained
by combining a change in trade taxes with a compensating change in the base or rate of
the VAT, the authors argued that welfare can be reduced even in the absence of an
informal sector. Emran and Stiglitz (2005: p143) challenged the conventional view,
arguing that the relatively large informal sector, level of corruption, monetization, high
shares of agriculture and small businesses in developing countries may justify a different
tax policy design.

They went further to say, The key assumption in their theory is that firms in developing
countries can evade taxes completely by shifting entirely to cash transactions and not
using the financial sector as the financial sector plays a critical role in the functioning of
the tax structure. Gemmel and Morrissey (2003) asserted that taxes on intermediates such
as fuel are often thought to be regressive because they affect transport costs, thus
increasing the prices of goods consumed by the poor.

The important implication of this for tax policy is that, on the basis of distribution and
poverty, taxes on goods that are most important in the consumption bundles of the poor
should be kept as low as possible. The rising popularity of this type of fiscal reforms has
prompted researchers to examine its performance. Gordon and Nielsen (1997) found that
the tax in the presence of a small informal sector (3.4 percent of GDP), reduces evasion
costs despite the increase in cross-border shopping.

30
Moreover, Chidakwa (1996) estimated the productivity of Zimbabwes major tax heads
and the overall tax system. His study found sales tax (VAT) to be elastic while the total
tax system, excise duty and corporate tax were inelastic. However, Lambert and Suckling
(1986) in their paper titled Revenue Elasticity of the Zimbabwean Individual Income
Tax covering the period (1967 - 1981) found that corporate and individual income
taxes were buoyant and elastic.

2.3.7 Tax Revenue Productivity and Deficits

In their study Masood et al (2010) found the coefficient of growth of budget deficit was
significant and had a positive sign which show that as budget deficit increases
government of developing countries increase their fiscal efforts to reduce this budget
deficit by direct tax. However, Amin (2000) argued, the revenue structures of most
developing countries have not been as productive as preferred. Government expenditure
for developing countries in most instances is not in tandem with the revenue growth
consequently vast discrepancies between the demand and supply of public budgetary
resources.

Ariyo (1993) concluded while applying the test by Blinder and Solow (1973), (Buiter
1983) and (Zee 1988) that Nigeria was unable to get out of its fiscal deficit profile over
the years. Ariyo and Raheem (1990) drew the attention to the fact that the unsynchronized
revenue and expenditure profile since 1970s caused the recurrent fiscal deficit profile of
Nigeria to be unsustainable.

Iyoha (2004), suggested that given the structural and systematic problems commonly
associated with developing countries, budget deficit regularly appears in the course of
governance and such are usually financed by either borrowing from the central bank, non-
banking public and external sources. The author emphasized that fiscal deficits raise the
level of money supply which in turn sets in motion private sector wealth and asset
portfolio decisions with respect to financial and real assets. These countries had to carry
out a lot of reforms in tax structures with the general objectives of revenue adequacy,
economic efficiency, equity, fairness and simplicity. However, Alade (2003) was of the

31
opinion that fiscal deficits could stimulate aggregate demand and set a country on the path
of recovery.

2.3.8 VAT Performance Methodologies

Alemu (2011) postulated that the data on revenue collection used in estimating tax
buoyancy by adding in the impact of any discretionary changes in the tax rate or both
during the reporting period. However, the data on revenue collection used in estimating
elasticity excludes the impact of any discretionary changes during the reporting period.
Accordingly, tax buoyancy measures the efficiency of both underlying tax structure and
discretionary changes, whilst tax elasticity measures the efficiency of the fundamental tax
structure. VAT productivity is another tool for measuring the performance of VAT, it is
derived by dividing the ratio of VAT revenues to GDP with a VATs standard rate Bird and
Gendron (2006).

In addition, more analytical tools for determining VAT performance include the efficiency
ratio and C-efficiency ratio as suggested by Ebrill et al (2001). Efficiency ratio (E) is
defined as the share of the VAT in GDP divided by the standard VAT rate. As a result, an
efficiency ratio of for instance 30 percent implies that if the standard VAT rate is
increased by one percent, the share of the VAT revenues in GDP is expected to increase
by 0.3 percentage points. Hence according to Agha and Haughton (1996) higher
efficiency ratio implies VAT performance will be better. Logically the efficiency ratio is
an imperfect and even misleading statistic.

The C-Efficiency ratio is defined as the share of the VAT in consumption divided by the
standard VAT rate. Given the underlying facts the findings based on consumption rather
than GDP is a more reliable investigative tool than the Efficiency Ratio according to (Le
2003).

32
2.4 Empirical Literature

Relevant studies have been carried out on this study in various countries as in Oriakhi and
Osemwengie (2013) for Nigeria, Okech and Mburu (2011) for Kenya, Bilquees (2004) for
Pakistan, Chipeta (1998) for Malawi, Kusi (1998) for Ghana, Osoro (1993) for Tanzania,
Harris and Wigwiri (1980) for Zimbabwe, and Choudhry (1979) for USA, UK, Malaysia
and Kenya. In the assessment of tax revenue productivity in Zimbabwe, Harris and
Wigwiri (1980) concluded that the tax system was buoyant and income elastic although
the study period of 11 years was too short to have such meaningful results according to
Newbold (1995). Later on Lambert and Suckling (1986) reinforced these results in the
study called Revenue Elasticity of the Zimbabwean Individual Income Tax.

However things changed over time with Chidakwa (1996) doing a similar study in
Zimbabwe when he found that the whole tax system was inelastic with the exception of
sales tax. He noted that in some instances the income generated by small and medium
sized businesses and the informal sector exceeded that earned by the registered
businesses. In that respect, he recommended broadening of the tax base and upholding the
principles of equity in taxation. Recently, Ndedzu et.al (2013) evaluated the revenue
mobilization capacity of the Zimbabwe tax system and the results showed that the tax
system as a whole and the individual taxes, with the exception of customs duty, were not
buoyant.

Chipeta (1998) evaluated tax reform as instruments for raising tax yield in Malawi. Two
sets of regression equations were estimated where tax revenue was regressed on GDP in
the first set and tax revenue being regressed on GDP in individual tax revenue equations,
in the second set. Results reviewed that a few taxes were buoyant but the whole tax
system was inelastic. It was then concluded that relying on increasing tax rates, extending
taxes to new activities and introducing new taxes were not sufficient for raising the
buoyancy of the tax system.

In another study in Kenya by Muriithi and Moyi (2003), tax reforms in Kenya had a
positive impact on the overall tax structure and on individual tax handles except for VAT

33
which failed to respond to changes in income. However a similar study for the period
1986 - 2009 in Kenya by Okech and Mburu (2011) found neither a buoyant nor income
elastic tax system despite tax reforms undertaken over the period. The implication was to
reconsider the tax reforms to make the tax system productive.

Osoro (1993) analysed the revenue productivity implications of tax reforms in Tanzanian.
Results showed that tax reforms had failed to raise the revenue productivity. This was
reflected by the elasticity coefficients of less than unit for the major taxes and the total tax
system. The results were attributed to granting generous exemptions and poor tax
administration. In order to raise the overall elasticity of the tax system, it was
recommended to focus more attention on the most income elastic taxes.

In Nigeria, Oriakhi and Osemwengie (2013) examined the productivity of Nigerian Tax
System for the period 1981 - 2009 using the concept of tax buoyancy. The study however
reported unsatisfactory level of total tax revenue productivity. This was attributed to
negligence of both management of oil and non-oil revenue, institutional failing and
corruption in the tax revenue collection. This called for serious attention and policy
challenge considering the enormous importance of generating resources and less
dependence on external borrowing to foster high economic performance.

Contrary to other studies across Africa, Kusi (1998)s study on the responsiveness of
Ghanaian tax system found that the tax reform of 1983 - 1993 had significant impacts on
the productivity of both the individual taxes and the overall tax system thereby causing
the overall tax system to be buoyant and elastic. These results were later reinforced by
Twerefou et.al (2010) and general to specific recommendations aimed at improving tax
collection were made.

Other studies done overseas Bilquees (2004) and Choudhry (1979) showed that generally
the tax systems in the developed countries of the USA, the UK and Malaysia were
buoyant and income elastic. This was attributed to sophisticated methods of tax collection
as well as a developed and vibrant tax base. However, in Pakistan results show that the
use of discretionary tax measures has been heavily relied upon as a source of revenue.

34
Jalata (2014) concluded that VAT boosted the general economic growth of Ethiopia but
the issue of regressively resembling to sales tax still continued. He argued, the findings
also revealed that VAT, Total tax revenue and Non-tax revenue except Foreign revenue
positively contributed for economic growth. Similarly, according to Adereti et al (2011)
citing Shalizi and Squire (1988) VAT accounted for more total tax revenue in Cote
dIvoire, Kenya and Senegal in 1982. This led Bogetic and Hassan (1993), to conclude
that VAT generates higher revenue in countries with a single VAT rate than in countries
with multiple VAT rates.

Moniruzzaman et al. (2011) suggested that the performance of VAT in Bangladesh was
quite satisfactory in the initial years but subsequently VAT collection remained stagnant at
a certain level. However, convincingly Tait (1989) as in Adereti et al (2011) proved that
VAT has been in effect in Ecuador and Mexico since 1973 and by 1983 accounted for
12.35% and 19.71% of total government revenue in these countries. The study conducted
by Teera (2003) showed that Ugandas tax effort index for total taxes on income were less
than unity, while the indices for international trade taxes and taxes on products exceeded
unit.

In their paper Desmond and Ugochi (2013) found that VAT in Nigeria had significant
impact in explaining the variations in national revenue collected. They concluded that
concerted effort towards proper examination of VAT administration policy will not only
boost revenue but will provide the synergy expected to grow the economy. On the other
hand, Muriithi and Moyi (2003), applied the concepts of tax buoyancy and the results
showed that tax reforms had a positive impact on the overall tax. The study concluded
that despite the positive impact, the reforms failed to make VAT responsive to changes in
income. In addition, sufficient information is rarely available to estimate the VAT revenue
that would be raised if the tax reform rules were implemented perfectly and the extent of
evasion is generally unobserved (Tanzi and Howell 2000).

Chipeta (1998) evaluated effects of tax reforms on tax yields in Malawi for the period
(1970 - 1994). The results indicated buoyancy of 0.95 and an elasticity of 0.6 and
concluded that tax bases had grown less rapidly than GDP. On the contrary, Kusi (1998)

35
showed a pre-reform buoyancy of 0.72 and elasticity of 0.71 for the period (1970 to
1982). The period after reform showed increased buoyancy of 1.29 and elasticity of 1.22.
Therefore an efficient tax system. Nevertheless, Adari (1997), proved that buoyancy and
elasticity coefficients were less than unit implying a low response of revenue from VAT to
changes in GDP in Kenya.

Osoro (1993), found overall elasticity to be 0.76 with buoyancy of 1.06. The study
concluded that the tax reforms in Tanzania had failed to raise tax revenues. These results
were attributed to the government granting numerous tax exemptions and poor tax
management. Little evidence is there regarding VAT performance in economies using
many foreign currencies as a result of economic incapacitation.

2.5 Chapter Summary

Empirical literature reviewed that there is a heavy dependency on taxes as a source of

revenue in developing countries. However, the surveyed literature has pointed to the fact
that the tax systems in developing countries are variably buoyant especially in the recent
periods. Zimbabwes literature is short changed in terms of coverage when compared to
other countries like Kenya despite an inelastic tax system being reported by a recent study
(Ndedzu et al 2013). The following chapter present the methodology used to estimate the
buoyancy coefficients.

36
 CHAPTER III

RESEARCH METHODOLOGY

3.0 Introduction

The chapter sets out the methodology that is used in undertaking the research. The
research methodology describe how the study is carried out. It focuses on methods or
techniques used in conducting the research, the rationality behind the methods employed,
and justifications for each of the approaches or techniques. The chapter therefore is
concerned with research design, research instruments, data collection procedures, data
presentation and analyses plans.

3.1 Research Philosophy

The positivism (quantitative) paradigm was a matter of producing deductive reasoning

using the control characteristics. Data was then collected and measured against the
hypothesis to come up with an empirical assessment of VAT efficiency or productivity in
the multicurrency regime. This paradigm places emphasis on numerical analysis and
objectivity, reliability and replication of findings, but it is challenged on addressing the
social aspects of this research.

3.2 Research Design

Research design constitutes the blueprint for the collection, measurement, and analysis of
data (Phillips, 1971). Whereas Kerlinger (1966) suggest that it is a plan and structure of
investigation considered as to obtain answers to the research questions.

37
This research was not a mere normative and academic theory trying to discuss issues
about VAT efficiency, but it applied a positive and objective approach using empirical
assessment guided by international standards for the various relevant variables identified
to measure effectiveness. The time frame covered was the multicurrency era from (2009
to 2014). The data found was interpreted accordingly to produce a firm conclusion of the
problem statement while addressing the objectives of the study. To help reinforce the
outcome, opinions were sought from VAT experts to help interpret the findings and to
give comments and recommendations. The following subsections outline the research
design in more detail.

The exploratory nature of the research question meant research should follow an
exploratory research design. Research questions under this study are more focused on the
what, can be said about VAT efficiency and less on the why part. Hence because of
this fundamental characteristics of the research, the exploratory research was adopted for
the purpose of the study carried out. Furthermore the study undertaken sort to uncover
basic facts about the topic and thereby allowed consideration of different aspects about
VAT to be made. This was also necessary considering the fact that the country in question
is depending solely on tax revenue.

3.3 Research Method

A research method defines the techniques applied in order to obtain and analyse data,
Saunders et al. (2009) and Kothari (2004). The researcher used quantitative approaches
that were adopted to define theoretical hypothesis and measurement of variables and
establish the relationship between tax heads and economic growth measured by GDP.
Therefore the research use quantitative techniques to investigate and draw conclusions
based on the available data.

38
3.4 Estimating Regression Models

Buoyancy estimating models were borrowed from Singer (1968)s multiplicative

functional form of a tax revenue model specified as:

T k t=e Y t e t ... (1)

Where;

Tt Yt
= total tax revenue, k = Individual tax, = current real income (GDP), =

t
constant term, = an estimateable parameter, e = natural number and = stochastic

error term with mean zero and constant variance.

The standard practice in assessing the productivity of a tax system as used by Ole (1975),
Wilford (1978a), Rao (1979), Omuroyi (1983), Asher (1989), Ariyo (1997) and (Wawire
(2000) was followed for this description.

3.4.1 Tax Buoyancy Estimation

Tax buoyancy measures the responsiveness of tax revenue to changes in income with no
attempt to control for discretionary changes in policy. To estimate the parameters of the
individual tax revenue model in equation (1) using the OLS method, the multiplicative
equation is linearized by taking the logarithms of the variables. Thus, the general
estimating equations for the buoyancy of the VAT and PAYE are:

log T k = 0+ 1 log GDPt +e k

t
.... (2)

Where;

Log = Natural logarithm, k = VAT, GDP = Gross Domestic Product, e = Error

term

39
 log TR x = 0 + 1 logGDP t +e k
t
.... (3)

Where;

Log = Natural logarithm, TR = Total Revenue, x = PAYE, GDP = Gross

Domestic Product, e = Error term

3.4.2 Estimation Procedure

The necessary data cleaning procedures were carried out using E-views version 7. These
procedures involved the identification of any possible outliers and the computation of the
data descriptive statistics (mean, median, and standard deviation etc.). The buoyancy
coefficients were estimated using the OLS approach which yields Best Linear Unbiased
Estimates (BLUE). However for OLS to yield BLUE results the basic assumptions of
OLS should hold meaning we carried out stationarity tests and normality tests.

3.4.3 GDP Frequency Conversion

Frequency conversion permitted converting a series of data from one work file frequency
to another. In E-views, this meant copying a series of data from one page of a work file
(annual) to another page (monthly) with a different frequency.

Data was moved from a lower frequency to a higher one, thus it was set from "Low to
High". The method adopted was the Linear-match last, this inserted the low observation
value into the last period of the high frequency data and then linear interpolation was
performed on the missing values. Trend function returned values along a linear trend,
fitted a straight line (using the method of least squares) to the arrays known_y's and
known_x's. Returned the y-values along that line for the array of new_x's that were
specified. The method was selected because it assumed real GDP grew following a linear
rate throughout the year.

40
3.4.4 VAT Efficiency with Respect to Other Variables.

In modelling the impact of VAT and PAYE on the price level, we followed Fatukasi
(2005) modelling approaches to inflation.

The econometric equation is specified in dynamic logarithmic form as;

log VAT=a0 +log CPI +a 1+ log M t +

... (4)

Where;

Log = Natural Logarithm, CPI = Consumer Price Index, M = Imports, t = Time,

= Error term

log PAYE=a0 + logCPI + a1+ log X t +

. (5)

Where;

Log = Natural Logarithm, CPI = Consumer Price Index, X = Exports, t = Time,

= Error term

3.2.5 Computation of Raw Data

The VAT Gap is typically expressed as the percentage of Net VAT due.

Gt =t At

(6)

Where;

G = VAT Gap, = Budgeted Collections, A = Actual Collections, t = Time

41
3.5 Data Collection Procedure

3.5.1 Secondary Data and Justification

Secondary data refers to data that is already in existence. As evidenced by the research
design, the study gives preference to secondary data due to the historical nature of the
data.

3.5.2 Types and Sources of Data

The study mainly used secondary data from Zimra and Zimstat for the period (2009 to
2014).

3.6 Time Series Data Analysis

Data was processed and analysed using Eviews version 7 which is one of the statistical
packages for data analysis. Since the data in question is time series, preliminary tests were
carried out to establish stationarity of the series and Augmented Dickey-Fully was used.

3.6.1 Descriptive Statistics

The descriptive statistics were established to get the means, medians, standard deviations
and the normality test for each of the variables.

3.6.2 Diagnostic Tests and Model Estimation

The use of individual tax heads significantly lowers the probability of measurement errors
of which violations of the Classical Linear Regression Analysis (CLRA) have various
impacts on the validity of a given model. Hence possible violations of linear regression
should be tested on the models before they are used.

The major linear regression assumptions that must be checked in a given model include
serial correniality that is independence of residuals and whether residuals are normally
distributed and data stationarity etc.

42
3.6.2.1 Unit Root Tests - Stationarity Test

Using the Augmented Dickey-Fuller (ADF) test for stationarity, unit root tests were
carried out for each variable. Serial correlation was tested to establish data normality. The
ADF-Test was used on series on level {1(0)}. Conclusions about stationarity were made
by comparing the ADF-Statistic and the Critical values at 1%, 5% and 10 %.

When the ADF-Statistic is greater in absolute terms than the critical value, the series are
said to be stationary and the reverse implies non-stationarity. Series that are stationary in
levels are integrated of order zero {1(0)}. While those stationary after the first difference
are integrated of order one {1(1)} and if stationary after the second difference, then the
series are integrated of order two{1(2)} and so on.

3.6.2.1.1 Stationarity Test Hypothesis

Ho :
Monthly Time series data resembles non-stationarity

H1:
Monthly Time series data is stationarity

3.6.2.2 Serial Correlation Test

The OLS method depends on the assumption of no serial correlation. Serial correlation is
a possible problem that appears when working with time series data where the error term
is a function of its past values (Andren, 2007). Having an autocorrelated error term may
mean that the coefficients are unbiased and consistent. Graham and Saporoschenko
(1999) Statistical interpretations based on autocorrelated data cannot be depended upon
due to standard errors.

The Durbin Watson statistic is one test for serial correlation based on the assumption that
the structure is of first order and it is reported together with a regression output. However
the Durbin Watson statistics are difficult to interpret hence there is need to apply the
Breusch-Godfrey Test for serial correlation known as the Serial Correlation LM test in
order to overcome this limitation. For the Durbin Watson test, absence of serial

43
correlation is noted by a Durbin Watson statistic of close to 2. A Durbin Watson statistic
which is in between 2 and 4 indicates the possible presence of negative correlation and
the statistic will be below 2 in the presence of positive serial correlation.

3.6.2.3.1 Serial Correlation Test Hypothesis

Ho :
A serial correlation exist on the time series data

H1:
A serial correlation does not exist on the time series data

3.6.3 Time Series Regression

After carrying out preliminary tests in line with time series data, and using Ordinary Least
Squares method, regression equations were run according to what the researcher wanted
to find out. Elasticity of individual tax was decomposed into elasticity of tax-to-base and
elasticity of base-to-income (GDP).

3.6.4 Testing for Research Hypotheses

The purpose of hypothesis testing is to determine the accuracy of a hypotheses because a

sample of data was collected. Two kinds of hypothesis are used in classical tests: the null
hypothesis and the alternative hypothesis. The null hypothesis is used for testing. It is a
statement that no difference exists between the parameter and the statistic being compared
to it. If we reject a null hypothesis, then we are accepting the alternative hypothesis.

3.6.4.1 Hypothesis Testing

i. Formulation of Null and Alternative Hypothesis

Equation (2) present the regression function with the estimated parameters together with
the corresponding standard errors within parentheses. What is the effect of GDP on VAT?
To know if the parameter estimate for the slope coefficient is significantly different from
zero or not. We start by stating the hypothesis:

44
 H o : 1=0

H 1 : 1 0

ii. Statistical Test Function

The estimated parameter is transformed according to the null hypothesis and that
transformation was used as a test function. The t-statistic value is computed as follows;

(Estimated AlphaHypothesized Alpha)

T Statistic =
Standard Error of Alpha

iii. Level of Significance

The 95% Confidence Interval (-1.96:1.96) was measured suitable for this study, thus a 5%
significance level was chosen for the statistical tests. This translates to a 5% probability
that values outside the interval may be obtained.

iv. Computation of calculated difference value

v. Critical Value

If the test value is larger than the critical value in absolute terms we reject the null
hypothesis. Otherwise, we just accept the null hypothesis and say that it is possible that
the population parameter is equal to zero.

Critical value: tc = 1.96

vi. Decision Criteria

For a null hypothesis, a p-value which is greater than the significance level shows that the
intercept is not statistically significant. On the other hand, a p-value which is less than the
significance level shows that the average intercept is significantly different from zero.

45
3.7 Data Presentation and Analysis Procedures

The data tested and calculated was tabulated and graphical illustrations were presented in
the subsequent chapter.

3.8 Chapter Summary

This chapter provide the critical methodological approach of the research. It also justify
the design and the tools used. A data presentation and analysis plan is also provided. The
chapter is a crucial section of any research since the correct design, strategy, samples, data
collection tools and data presentation and analysis plan are the right ingredients for a
good and reliable research.

CHAPTER IV

DATA PRESENTATION, ANALYSIS AND

DISCUSSION OF RESULTS

4.0 Introduction

This chapter present the empirical results from the estimations done as stated in chapter
three. Diagnostic tests are presented first while stationarity tests, descriptive statistics and
regression follows thereafter. More so, Interpretation of the results is given.

4.1 Diagnostic Test Results

Table 1: Results of the Model Diagnostic Tests

46
Model Test P.Value Decision @ 0.05

Autocorrelation 0.6411 No autocorrelation

Model Specification 0.4517 Model correctly specified

log VAT= 0 + logCPI + 1 +
Log Normality 0.8384 Normally distributed

Mt+ Autocorrelation 0.8195 No autocorrelation

Model Specification 0.6725 Model correctly specified

logPAYE= 0
+ log CPI + Normality 0.2878 Normally distributed

1+ log X t +
Autocorrelation tested using the LM test in both regressions and results have shown
was
the absence of autocorrelation, that is, the p-values of 0.6411 and 0.8195 respectively, are
both greater than 0.05. After the data has been stationarised, p-values of 0.8384 and
0.2878 are greater than 0.05 confirming that the data is normally distributed. The model
has been correctly specified as noted by the p-values of 0.4517 and 0.6725 which are
greater than 0.05.

4.2 Stationarity Test Results

Table 2: ADF Unit Root Test Results

Variable Dickey Fuller Test Critical Value* Integration Conclusion

Order

Buoyancy

(8.822962) (4.094550) I(0) Stationary

(5.687577) (4.096614) I(0) Stationary

(14.49347) (4.092547) I(0) Stationary

47
Imports& Exports

(9.783802) (4.096614) I(1) Stationary

(4.541351) (4.092647) I(0) Stationary

(15.03805) (4.094550) I(0) Stationary

(10.98501) (4.094660) I(1) Stationary

(4.332166) (4.092547) I(1) Stationary

*MacKinnon (1996) one-sided p-values.

Notes:*/**/*** indicate stationarity 1%, 5% and 10% respectively. The optimal lag length used for (ADF) is
determined using the Schwartz Information criterion

The Augmented Dickey fuller test was used to test for stationarity of variables. After
performing unit root tests on level {1(0)}, all the variables were stationary at the 1% level
of significance as shown in Table 2 below. If Dickey fuller test statistic was to be greater
than the critical value, the null hypothesis of non-stationarity was to be rejected.
Stationarity test were performed for Imports and Exports on level {1(0)} and {I(1)}, all
the variables were stationary at the 1% level of significance as shown in Table 2 above.

4.3 Descriptive Results

Descriptive Statistical Analysis examined measures of dispersion and central tendency for
each variable and Table 3 below gave a summary of the statistics.

Table 3: Summary of Descriptive Statistics

VAT PAYE GDP

Mean 81,400,853.17 48,119,170.18 10,681,665,933.33
Median 89,429,576.35 51,409,940.83 11,019,401,187.50
Maximum 141,528,095.47 89,759,219.73 13,908,190,000.00
Minimum 595,290.78 556,339.93 4,727,484,016.67

48
Std. Dev. 29,028,733.33 21,847,067.29 2,571,600,043.76
Skewness (0.89) (0.41) (0.55)
Kurtosis 3.43 2.59 2.30
Jarque-Bera 10.07 2.49 5.06
Probability 0.01 0.29 0.08
Sum 5,860,861,427.95 3,464,580,252.65 769,079,947,200.03
Observations 72 72 72

4.4 Regression Results

The empirical results obtained from OLS estimation of the buoyancy of VAT and PAYE
and of VAT against Import and PAYE versus Exports in Zimbabwe are shown in Table 4
below.

Table 4: VAT & PAYE Model Estimates

Tax Head Coefficient T - Statistic Probability R2 DW

Buoyancy

1.286807 10.65219 0.0001 0.618465 1.986574

2.012222 16.39046 0.0000 0.793295 2.282313

Imports & Exports

0.8359 4.2418 0.0001 0.6778 1.667041

(M)
(0.1495) (4.1157) 0.0000 0.7289 1.982297
(X)

49
4.5 VAT Gap Analysis

In terms of the VAT Gap this translated to an average of a 0.0409 percentage points for
the six years under review as shown in the table below, indicating minor leakages of
4.09% between the payer and the administrator (ZIMRA).

These minor leakages are normally in the form of zero rated supplies, exempt supplies,
false claims of input tax credits and trader fraud among others. The VAT Gap is typically
expressed as a percentage of net VAT due. A Gap of a 4% is low; thus portrays a health
administration system. This level of VAT gap indicates that the administration system is
effective enough. Probably due to effective audits trails, compliance management and
bank garnish orders.

Table 5: VAT Gap Computation

Year Actual Collections Collections Target VAT Gap

2009 364,528,257.09 404,306,043.78 (9.84%)
2010 832,015,099.75 734,554,761.33 13.27%
2011 1,094,603,293.94 990,000,000.00 10.57%
2012 1,248,028,790.95 1,098,317,300.00 13.63%
2013 1,135,850,855.64 1,125,800,000.00 0.89%
2014 1,185,835,130.58 1,235,000,000.00 (3.98%)
Average VAT Gap 4.09%

Source: Author`s Computations

50
4.5.1 Trends in VAT Collections

It is natural to begin with the most basic indicator of the performance of any VAT: the
Revenue it raises. Trends in VAT Revenue Collections and GDP are shown below. The
chart in figure 2 below showed that VAT and GDP are running parallel which means VAT
is growing as GDP is growing.

Figure 2: Relationship between GDP and VAT.

GDP versus VAT Trends

$16.00 $1,400.00
$14.00 $1,200.00
$12.00 $1,000.00
$10.00 GDP
$800.00
$8.00 Linear (GDP)
$600.00
GDP ($Bil) $6.00 VAT
$4.00 $400.00
Linear (VAT)
$2.00 $200.00
$- $-

VAT ($Mil)

Source: Author`s Computations

4.6 Interpretation of Research Findings

2
The coefficient of multiple determination adjusted ( R ) was strong (more than 60%),

which indicated the power of the explanatory variables in explaining variations in our
variables. The model had high F-statistics, showing that all the independent variables are
non-zero at 95% level of confidence. The value of the Durbin Watson statistics on the
other hand revealed the presence of negative auto-correlation in the model that can be
attributed to the quality of the data used.

51
4.6.1 Buoyancy Estimates

Table 4 above showed the buoyancy estimates of VAT and PAYE on a monthly basis. The
estimated buoyancy coefficient of VAT for the period 2009 to 2014 was 1.2868. This
coefficient had a positive sign and was statistically significant at the 1% level of
significance. This meant for every 1 percent increase in national income, revenue from
VAT grew by an average of 1.2868 percent.

This result is above unit (one). As such, VAT is buoyant with respect to national income
and hence very efficient. This result can be attributed to high propensity to consumption
as the propensity to save is very low and most people are below the poverty datum line
hence can only afford to purchase basic commodities and end user products. More so, it is
next to impossible to evade VAT for consumers due to the enforcing collection method
unlike other tax heads which depend on the trustworthiness of the remitter.

PAYE had an estimated buoyancy coefficient of 2.0122. The coefficient had a positive
sign and was statistically significant at 1% level of significance. This meant for every 1
percent increase in gross income, PAYE revenue increased by 2.0122 percent. Thus the
PAYE was responsive to changes in its base and hence generated enough funds more than
VAT. This showed how PAYE is slowly becoming very efficient as compared to VAT. The
productivity of this tax source can be attributed to the adoption of the final deduction
system which means employers deduct and remit income tax at source.

This tax is resurrecting from its hibernation of parallel payrolls by companies especially
government entities, lack of transparency and accountability in both the private and
public sector. Major packs which some bosses were pocketing without remitting a single
cent to treasury has shown some improvement to fiscus in form of income tax due to the
recent widespread exposures. This, according to the Ansolf matrix show that PAYE is
now a star with a brighter future and continues to rise above board, while VAT remains a
cash cow which is being milked or is covering for a majority of underperforming tax
revenues.

4.5.2 Imports and Exports

52
There was a positive relationship between consumer price index (Inflation) to VAT of
0.8359. Table 4 showed results of VAT and PAYE against Exports and Imports, thus from
the results it was noted that there is a strong relationship between VAT and Imports
because Zimbabwe currently a heavy importer of many products. However, there was a
negative relationship between PAYE and Exports, thus an increase in exports will not lead
to any rise in the incomes of employees.

4.7 Discussion of Findings

The study findings indicate Efficiency of VAT collections. However, Ndedzu et al (2013)
found that Zimbabwean VAT/Sales Tax had an estimated elasticity coefficient of 0.735 for
the period (1980 - 2008). He argued that this tax heads revenue growth was not keeping
pace with the growth of GDP and hence it was income inelastic. Sales tax had a lot of
weaknesses in terms of revenue leakages hence its replacement by VAT, inefficiencies
were as a consequence of poor administration system and sales tax was collected at the
end of production stage. Based on this study`s findings, VAT is efficient due to stable
macroeconomic environment

Nonetheless, this study`s findings were similar to those of Charlet and Butdens (2012) as
they indicated buoyancy of consumption taxes in the Barbados during the period (1980 to
1996) was approximately 1.5%, while the buoyancy of the VAT was 1.79 % in the post-
VAT era of (1997 to 2011). Therefore according to Bihar (2010) buoyancy of Sales
Tax/VAT with respect to GDP increased significantly. Furthermore, according to Murrithi
and Moyi (2003) from their study, import duty was the most buoyant tax component
while the VAT was the least buoyant.

There was a positive relationship between VAT and Imports. However, there was a
negative relationship between PAYE and Exports. There was a strong positive
relationship between VAT and inflation thus according to study by Ikpe et al (2013) VAT
exerts a strong upward pressure on price levels, most likely due to the burden of VAT on
intermediate outputs. Their study ruled out the option of VAT exemptions for intermediate

53
outputs as a solution, due to the difficulty in distinguishing between intermediate and
final outputs. Instead, it recommended a detailed post-VAT cost-benefit analysis to assess
the social desirability of VAT policy in Nigeria.

The VAT and GDP trends showed that VAT and GDP are running parallel which means
VAT is growing as GDP is expanding. A negative constant can mean that if GDP was zero
VAT was to be zero as well. However findings from Kenya differed with our current study
because in a study that was carried in Kenya by Wawire (2011), the study empirically
affirmed that this characteristic of a good tax system is yet to be achieved. It was
established that VAT gap in Zimbabwe was relatively small thus tax compliance through
audits, enforcement and administration was effective. Similarly according to EU
Commission (2012), Econometric estimates of the determinants of the VAT Gap show
that VAT compliance appears to fall when tax rates are increased, at least in countries
with weaker tax enforcement. In addition, VAT compliance appears to fall during
recessions.

4.8 Chapter Summary

This chapter present the results obtained from E-views and these results were interpreted.
Both VAT and PAYE were found to be buoyant with respect to their bases. The VAT gap
showed an efficient administration and there was a significant relationship of VAT and
imports and a negative link between PAYE and Exports. The next chapter provide policy
recommendations and suggest further areas for research.

54
 CHAPTER V

CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction

This chapter covers the summary of the research project, recommendations, suggestion of
future research based on the results obtained and conclusions. It encompasses the design
of the solution to identified problems in the market.

All the preceding chapters had diverse goals which where all directed to the major
objective of this study which was to evaluate the efficiency of VAT collections in the
Zimbabwean multicurrency economy so as to device credible policy remedies towards tax
revenue administration. This chapter give a summary of the study, recommendations and
areas of further study in line with the results obtained.

5.1 Summary of Key Findings

This study sought to evaluate the efficiency of VAT collections in the Zimbabwean
multicurrency economy, focusing on VAT and PAYE, and employing monthly time series
data from 2009-2014. The OLS method was adopted and the necessary tests were
performed. ADF tests were done to deter the possibility of spurious regression. The test
results suggested that all variables are stationary on level at the 1% level of significance.
On the other hand, regression results show that VAT and PAYE are positively related to
their bases and they are contributing sufficiently to the fiscus. Thus VAT contributed
1.29% while PAYE contributed 2.01%, to every 1% increase in their bases. To further
scrutinize the effectiveness of these findings, regression results for inflation, imports and
exports showed that there was a positive relationship between imports and VAT and a
negative relationship between PAYE and Exports.

55
5.2 Conclusions

5.2.1 Zimbabwes VAT Collection System is Efficient

Based on this study`s findings, VAT is efficient due to a stable macroeconomic

environment. Prices in terms of wages and commodities are stable thus with the little
incomes consumers are getting, they are able purchase what they can afford mainly basic
commodities which attract VAT at 15%. The VAT and GDP trends showed that VAT and
GDP are running parallel which means VAT is growing as GDP is expanding.
Zimbabwe`s GDP is growing at a slow rate and consequently VAT is following the same
trend. Intensive efforts by ZIMRA to curb corruption and carrying out of audits, company
registration and compliance are the major reasons why VAT is efficient in the
multicurrency economy.

The disposable income which consumers currently have is only sufficient to purchase
goods and services which sustain livelihood. This is because of the current economic
constrains characterised by liquidity crunch, high unemployment and low wages below
the poverty datum line. However, as people are buying basic commodities which are in
most cases exempt and/ or zero rated supplies, this has an effect of minimising the
revenue collected.

5.2.2 Zimbabwes PAYE is Efficient more than VAT

This study showed PAYE is very efficient as compared to VAT. The productivity of this
tax is attributed to the adoption of final deduction system (FDS) which means employers
deduct and remit income tax at source. This tax has also shown some improvement to
treasury due to the recent widespread exposures of companies especially parastals.

5.2.3 Existence of a Positive Relationship between VAT and Imports

There was a positive relationship between VAT and Imports mainly because the low
capacity utilisation by domestic companies has allowed an inflow of foreign products
mainly from South Africa, Japan and China among others. On the other hand, Zimbabwe

56
like many developing counties has ratified too many trade facilitation agreements. These
agreement eliminate tariffs and import taxes thus goods and services are exchanging
economic hands with little revenue to the government.

5.2.4 VAT Gap Showed Efficient Collection System

Methods being pursued by ZIMRA in the collection of VAT were found to be efficient
meaning targets set by the ministry of finance (MOF) are being met. However, even
though VAT is efficient, the revenue is not adequate because companies which are the
registered operators (agents) for VAT administration are closing shops due to economic
constrains thus revenue collections are declining despite VAT being efficient. This not
only erodes the tax base but also makes tax administration difficult and thus compromise
revenue efficiency. Majority of the economic activity is now resident in the informal
sector and these small to medium enterprises are not registered operators because they do
not exceed the required $60, 000.00 threshold in a calendar year. Moreover, they do not
have proper accounting books and relevant computer system to enable VAT collections.

5.2.5 Existence of a Negative Relationship between PAYE and Exports

There was a negative relationship between PAYE and Exports, exports generally benefit
entrepreneurs in form of business connectivity and profits. To this effect employees
wages and salaries are not improved as a result of a company exporting. Moreover,
Zimbabwe exports are very few in this economic space.

5.2.6 Hypotheses Adopted

H1 which provided that VAT is efficient with respect to GDP, is here being adopted
based on the conclusions.

5.3 Recommendations

We therefore recommend a variety of tax reform measures that are aimed at further
improving the revenue administration and collection capacity of ZIMRA.

57
5.3.1 Effective Policy Framework

Through expansionary fiscal policies, government should reduce tax rates to stimulate
aggregate demand and propel the industrial sector which is operating at less than its full
potential. With regards to PAYE, the government should come up with policies that are
able to bring into the tax net the numerous limited liability companies that comprise the
informal sector all over the country. This will go a long way in improving revenue
generation from this tax head because in some instances the income generated by the
small to medium businesses and informal sector, which are largely outside the tax system,
exceeds that earned by registered businesses.

5.3.2 Strengthening Capacity of ZIMRA

It will also be imperative to strengthen the capacity of the revenue agency to register
more eligible tax payers through the use of information systems and design of tax stamps
for various groups of commercial entities in the informal sector to broaden the tax base
since there is more room for improvement in collection.

Moreover, With regards to PAYE, there would be the need to reduce allowances and
fringe benefits as well as policies to improve coverage by capturing the informal sector
workers through effective monitoring of businesses particularly private ones and ensuring
every worker is registered with ZIMRA and NSSA.

5.3.3 Operational Efficiency of ZIMRA

Effective tax administration is needed to improve tax compliance, enhance revenue

collection and to prevent tax evasion and tax avoidance. To harmonize the operations of
revenue agencies like the municipalities councils, there is the need to resource ZIMRA
with Fiscal Studies experts from NUST and various tax schools because they have an in-
depth understanding of taxes and public finance.

58
5.3.4 Tax Rate Increment and Reductions

It is desirable to have a built-in flexibility in the tax structure that will enable revenue to
increase by greater proportion relative to increase in income. In this regard, reducing
some import duty rates on second hand products (like cars from Japan, clothes from
Europe and America) in order to reduce tax evasion and to expand the tax base,
imposition of relatively higher duty rates on commodities with higher income elasticity of
demand which are not produced locally. For VAT, an imposition of higher tax rates on
identified goods with high price elasticity of demand will help improve their tax to base
elasticity, however this must be done with caution as it has the potential of discouraging
the production as well as consumption of such commodities.

5.3.5 Broadening the Tax Base

Measures therefore need to be put in place by government to ensure a broad tax base.
Such measures may include creating an enabling business environment (that is a one-stop
business registration centre across the country which will deal with issues of registration,
taxation and incentive packages) for companies to flourish to enhance the company tax
base, making effort at improving productivity and consequently wages and eventually
increasing the base of personal income tax.

Identifying new items to bring into the tax net such as building shops left idle for at least
five years by their owners or raising rates on items with low excise duty such as locally
brewed spirit and other alcoholic beverages so as to increase the yield of this tax while
curbing the consumption of such commodities.

5.4 Suggested Areas for Further Research

A similar study in a stable economic environment like the multicurrency may yield more
convincing results especially if estimation are done on an annual basis. Future research
can also attempt to estimate tax elasticity estimates which eliminate tax changes to
discretionary measures by tax authorities.

59
5.5 Chapter Summary

In this chapter, the researcher conclude that VAT is Efficient as GDP is rising and more
items need to be identified and put into the tax base as we may strain VAT that is already
showing signs of struggling. In addition, recommendations were then made so as to
improve the tax revenue efficiency in a sustainable manner.

60
 REFERENCES

Adari, M. M., 1997. Value Added Tax in Kenya. Research Paper, University of Nairobi.

Adereti, S.A., Sanni, M.R., and Adesina, J.A., 2011 . Value Added Tax and Economic
Growth of Nigeria. 10(1). European Journal of Humanities and Social Sciences, pp471.

Agha A., & Haughton J. , 1996. Designing Vat Systems: Some Efficiency Considerations.
The Review of Economics and Statistics, Issue 2, p. 78.

Aizenman, J. and Jinjarak, Y. , 2005 . The collection efficiency of the value added tax:
theory and international evidence. eScholarship, pp. 1-24.

Ajakaiye, 2000. Macroeconomic Effects of VAT in Nigeria: A Computable General.

African Economic Research Consortium (AERC), Issue 92.

Alade, 2003. Fiscal adjustment in Nigeria : Issues in capital expenditure. The Bullion, pp.
8-16.

Alemu, D., 2011. Empirical Analysis of The Contribution of Value added tax For
Economic Development and Social Spending in Ethiopia (MSc Thesis).Issue Addis Ababa
University, Accounting and Finance. .

Amin, A., 2000. Microeconomics and efficiency effects of revenue policy in Africa.

Andrew M C Smith, Ainul Islam & M. Moniruzzaman, 2011. Consumption Taxes in

Developing Countries - The Case of the Bangladesh VAT. Issue 82.

Arguello, 2011. An analysis of the VAT in a Small Open Economy. p. 1.

Ariyo and Raheem, 1990. Deficit financing and economic development: Empirical
Perspectives from Nigeria. Issue Project report presented to the African Economic
Research Consortium.

Ariyo, 1993. An assessment of the sustainability of Nigerias fiscal deficit: 1970-1990.

Journal of African Economic, pp. 263-282.

Ariyo, A., 1997. Productivity of the Nigerian Tax System: 1970 - 1990. African
Economic Research Consortium, Issue 67.

Bendikien D., aparnis G., 2006. Changes in the ImpositionofValueAdded Tax in

Lithuania (1994-2004). / EngineeringEconomics, 47(2), pp. 23-29..

Bird, R. M., & Gendron, P. P. , 2006 . Is VAT the best way to impose a general
consumption tax in developing countries?. International Studies Program. Georgia State
University.

61
Bird, R., 2005. Value Added Taxes in Developing and Transitional Countries: Lessons and
Questions. First Global International Tax Dialogue Conference on VAT, Issue
International Tax Dialogue.

Blinder and Solow, 1973. Does fiscal policy matter?. Journal of public Economics, pp.
319

Bogetic, Z. & Hassan, F. , 1993 . Determinants of Value-Added Tax Revenue A Cross-

Section Analysis. Europe and Central Asia Country Department. The World Bank.

Brautigam, D.A., Fjeldstad, O.H., Moore, M. , 2008. axation and State Building in
Developing Countries: Capacity and Concent. Issue Cambridge University Press.

Buiter, 1983. The Theory of Optimum Deficits and Debt. Draft Document on the
National Tax Policy presented by the Presidential Committee on National Tax Policy.

Charles Y. Mansfield, 1972. Elasticity and Buoyancy of a Tax System. A Method Applied
to Paraguay, 26(2), pp. 425-426.

Charlet, A., and Butdens, S., 2012. The OECD International VAT/GST Guidelines: past
and future developments. World Journal of VAT/GST Law 1(2), pp. 175-184.

Chelliah et al , 1975. Tax Ratios and Tax Effort in Developing countries. IMF. Staff
Papers, 22(No. 1), pp. 187-205.

Chidakwa, A., 1996. Revenue Productivity of the Zimbabwean Tax System. M.A
Research Paper, University of Zimbabwe.

Chinwe, O., 2013 . Value Added Tax Remittance: Observations from Developing Country.
Global Journal of Management and Business Research Finance , 13(9).

Chipeta, C., 1998. Tax Reform and Tax yield in Malawi. AERC Research Paper, Issue 81.

Desmond Ndedzu, Archibold Macheka, M. Mavesere Ithiel, Tichaona Zivengwa, 2013.

Revenue Productivity of Zimbabwes Tax System. 2(4).

Desmond, Dr Anyanwu Godson & Ugochi, 2013. Dynamics of vat and economic growth
on revenue generation in Nigeria (1993 2011). International Journal of the Society for
Common Wealth Scholars in Research and Sustainable Development, Volume 5.

Ebrill, L., Keen M., Bodin, J. P., & Summers, V. , (2001).. The Modern VAT..
Washington, DC: IMF.

Emran & Stiglitz , 2005. On Selective Indirect Tax Reform in Developing Countries.
Journal of Public Economics , Volume 89, pp. 599-623.

Emran and Stiglitz, 2005. On Selective indirect tax reform in developing countries.
Journal of Public Economics, Volume 4, pp. 599-623.

62
Famous Prince IzedonmiAdesina Olugoke Oladipupo,, 2013 . Public Perception and
Attitude towards Value Added Tax (VAT) in Nigeria.

Fatukasi, B., 2005. Determinants of inflation in Nigeria: An empirical analysis.

International Journal of Humanities and Social Sciences, 1(18), pp. 262-271..

Gemmel and Morrissey, 2003. Tax Structure and the Incidence on the Poor in Developing
Countries. Ctr. for Research in Economic Development and International Trade, Issue
Research Paper No 03/18.

Golit, 2008. Appraising Nigerias Tax Effort: A Comparative Econometric Analysis.

Economic and Financial Review, Central Bank of Nigeria, 46(1), pp. 69-103.

Gordon and Nielsen, 1997. Tax evasion in an open economy: Value added vs. income
taxation. Journal of Public Economics , Volume 66, pp. 173-197.

Iyoha, M., 2004. Macroeconomics, theory and policy.

Jalata, D. M., 2014. The Role of Value Added Tax on Economic Growth of Ethiopia..

JenkinsG.P., 2008. Is the value added taxnaturallyprogressive?. Queens Economics

Department WorkingPaper, Issue 1059, pp. 1-23.

Joshua Aizenman, Yothin Jinjarak, 2005. The Collection Efficiency Of The Value Added
Tax: Theory And International Evidence.

Kaldor, 1963. Will Underdeveloped Countries Learn to Tax?. Foreign Affairs, Volume 41,
pp. 410-419.

Karran, T., 1985 . The Determinants of Taxation in Britain: An Empirical Test.. Journal of
Public Policy, Issue 5, pp. 365-386.

Keen and Lockwood, 2010. The value-added tax: Its causes and consequences.. Journal
of Development Economic , Volume 92, pp. 138-151.

Kiabel, D. B. and Nwokah, G. N. , 2009. Boosting Revenue Generation by State

Governments in Nigeria: The Tax Consultant Option Revisited. European journal of
sciences, 8(no 4. Available from: http://www.eurojournals.com/ejss_8_4_02.pdf.
Accessed 16).

Klemm, A. & Parys S. V. , 2009 . Empirical Evidence on the Effects of Tax Incentives.
IMF Working Paper (WP/09/136).

Lambert, J. D. & Suckling, R. J. , 1986. Revenue Elasticity of the Zimbabwean Individual

Income Tax, 19671981. Zimbabwe Journal of Economics.

Le., T. M., 2003. Analysis of Tax and Trade Incentives for Foreign Direct Investment. The
Case of Vietnam. Ph.D. Thesis. Kennedy School of Government, Harvard University.

63
Lockwood, 2000. The value-added tax: A model approach. Journal of Development
Economic, .

Lopez, A. and Kadar, Z, 2001. Introduction.. International Tax Review: World Tax 2002,
pp. 6-11.

Lortz and Morss, 1970. A Theory of Tax Level Determinants for Developing Countries.
Economic Development and Cultural Change, Volume 18, pp. 328 - 341.

Lymer, A. and Oats, L, 2010. Taxation Policy and Practice. 16 ed. Birmingham. : Fiscal
Publication.

Margalioth and Reuven, 2006. Taxation in Developing Countries: Some recent Support
and Challenges to the Conventional View. Journal of tax and Development Review, pp. 1-
8.

Marius Ikpe, Ndufu-Alike, Ikwo, Nigeria, Alwell Nteegah,, 2013. Value Added Tax and
price stability in Nigeria: A partial equilibrium analysis. European Journal of
Government and Economics, 2(2).

Milambo, M., 2001. Elasticity and Buoyancy of the Zambia Tax System. Unpublished
M.A. Paper, University of Nairobi.

Miller, A and Oats, L, 2009. Principles of international taxation. 2 ed. West Sussex: Tottel
publishing.

Mohammad, 2012. Effect of VAT and Tax on Economy: An Analysis in the Context of
Bangladesh. Research Journal of Finance and Accounting, 3(7).

Muriithi, M. K., Moyi, E. D., 2003. Tax reforms and revenue mobilization in Kenya.
African Economic Research Consortium, Issue 131.

Musgrave, 1969. Fiscal Systems. New Heaven: Yale University Press.

Nightingale, K., 2002. Taxation theory and practices. 4 ed. England: Pearson Education
Ltd.

Njoroge, J. W., 1993. Revenue Productivity of Tax Reforms in Kenya: 1972/73 -1991/92.
Unpublished M.A. Research paper: University of Nairobi.

Odusola, 2006. Internally Generated Revenue at the Local Government: Issues and
Challenges: Paper presented at the workshop on Revenue Generations at the state level
Ibadan University Musgrave RA (1959) Public Finance in Theory and Practice.

Ole, A. M., 1975 . Income Elasticity of Tax Structure in Kenya: 1962/63-1972/73.

Unpublished. M.A Research Paper, University of Nairobi.

64
Onaolapo and Fasina, 2013. An Investigation of the effect of VAT on Revenue Profiles of
South-Western Nigeria. European Journal of Business and Management, 5 (23 ISSN
2222-1905 (Paper) ISSN 2222-2839 (Online), www.iiste.org ).

Osoro, N., 1993. Revenue Productivity Implications of Tax Reform in Tanzania. Research
Paper No. 20, Nairobi; African Economic Research Consortium.

Owolabi and Okwu, 2011 . empirical evaluation of contribution of value added tax to
development of lagos state economy. International Monetary Fund, Washington D. C.,
Issue EuroJournals Publishing, Inc Paper 97/137/139.

Pasi, C. G. Z. -. G., 2014. economy and security of zimbabwe. harare, s.n.

Piggott and Whalley, 2001. VAT base broadening, self supply, and the informal sector.
American Economic Review 91, Issue 10841094.

Plumley, A., 2005. Preliminary update of the tax year 2001 individual income tax
underreporting gap estimates.

Prest, A. R., 1962. The Sensitivity of the Yield of Personal Income Tax in the United
Kingdom. The Economic Journal, Volume 72, pp. 576-96.

Qazi Masood Ahmed, Sulaiman D. Mohammed, 2010. Determinant of Tax Buoyancy:

Empirical Evidence from Developing Countries. European Journal of Social Sciences,
13(3).

Ring, 1999. The proportion of consumers' and producers'goods in the general sales tax..
National Tax Journal , 42(167179).

Riswold, S., 2003. Value Added Tax in Sub Saharan Africa: A Critique of IMF VAT
policy, London: University of London.

Shenk, A., and Oldman, O. , 2007 . Value Added Tax: A comparative Approach. New
York:: Cambridge University Press.

Shome, 2006. The control of tax evasion and the role of tax administration in Tax
Systems and Tax Reforms in South and East Asia. p. 40.

Shome, P., 1988. The Elasticity of Developing Country Tax System.. Economic And
Political Weekly, pp. 23,24.

treimikien D., Mikalauskien A. Lietuvos mokesi sistema ES kontekste, 2006.

Management ofOrganizations: Systematic Research. Issue 38, pp. 169-182..

Tait, Gratz and Eichengreen, 1979. International Comparisons of Tait Alan, Robert Ebel
and Tuan Minh Le (2005): Value Added Tax, National. In the encyclopedia of Taxation
and Tax Policy, Issue The Urban Institute press Washington , p. 461.

65
Tanzi and Davoodi, 1997. Corruption, Public Investment and Growth.

Tanzi and Howell, 2000. Tax Policy for Emerging Markets: Developing countries.
National Tax Journal, Andrew Young School of Policy Studies, 53(2), pp. 299-322.

Teera, 2003. Could Do Better: An Appraisal of Ugandas Tax Performance Relative to

Sub-Saharan Africa. Department of Economics, University of Bath, BA2 7A.
www.wikipedia.com.

Thisen J.K, 2003. Tax Reforms in Select African Countries. Ad-Hoc Expert Group
Meeting, p. 7.

Twerefou D. K. ,Fumey A, Osei Assibey E. and Ekow Asmah Emmanuel , 2008 .

Buoyancy and elasticity of tax: evidence from Ghana. Journal of Monetary and
Economic Integration, 10(2).

Unegbu, A.O. and Irefin, A. D. , 2011. Impact of VAT on economic development of

emerging nations. Journal of Economics and International Finance, Volume 3(8), pp.
492-503.

Wawire, N., 2011. Determinants of Value Added Tax Revenue in Kenya. UK: St
Catherine's College.

Zee, 1988. The sustainability and optimality of government debt. IMF Staff Papers, pp.
658-685.

Zhou and Madhikeni, 2013. Systems, Processes and Challenges of Public Revenue
Collection in Zimbabwe. American International Journal of Contemporary Research,
Volume 3(2), p. 49.

66
 APPENDICES

Appendix 1: Augmented Dickey Fuller Results

Null Hypothesis: LOG(GDP) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=11)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -14.49347 0.0001

Test critical values: 1% level -4.092547
5% level -3.474363
10% level -3.164499

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG(GDP))
Method: Least Squares
Date: 03/28/15 Time: 12:21
Sample (adjusted): 2009M02 2014M12
Included observations: 71 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

LOG(GDP(-1)) -0.092757 0.006400 -14.49347 0.0000

C 2.132836 0.144665 14.74331 0.0000
@TREND(2009M01) 0.000577 8.50E-05 6.782476 0.0000

R-squared 0.902068 Mean dependent var 0.015198

Adjusted R-squared 0.899187 S.D. dependent var 0.015560
S.E. of regression 0.004940 Akaike info criterion -7.741416
Sum squared resid 0.001660 Schwarz criterion -7.645810
Log likelihood 277.8203 Hannan-Quinn criter. -7.703396
F-statistic 313.1787 Durbin-Watson stat 2.148191
Prob(F-statistic) 0.000000

Null Hypothesis: LOG(VAT) has a unit root

67
Exogenous: Constant, Linear Trend
Lag Length: 1 (Automatic - based on SIC, maxlag=11)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -8.822962 0.0000

Test critical values: 1% level -4.094550
5% level -3.475305
10% level -3.165046

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG(VAT))
Method: Least Squares
Date: 03/28/15 Time: 12:23
Sample (adjusted): 2009M03 2014M12
Included observations: 70 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

LOG(VAT(-1)) -0.500882 0.056770 -8.822962 0.0000

D(LOG(VAT(-1))) -0.131867 0.078137 -1.687628 0.0962
C 8.952466 1.003110 8.924711 0.0000
@TREND(2009M01) 0.005093 0.001334 3.817023 0.0003

R-squared 0.609761 Mean dependent var 0.051260

Adjusted R-squared 0.592023 S.D. dependent var 0.263584
S.E. of regression 0.168359 Akaike info criterion -0.669989
Sum squared resid 1.870758 Schwarz criterion -0.541504
Log likelihood 27.44961 Hannan-Quinn criter. -0.618953
F-statistic 34.37574 Durbin-Watson stat 1.684656
Prob(F-statistic) 0.000000

Null Hypothesis: LOG(PAYE) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 2 (Automatic - based on SIC, maxlag=11)

68
 [

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -5.687577 0.0001

Test critical values: 1% level -4.096614
5% level -3.476275
10% level -3.165610

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(LOG(PAYE))
Method: Least Squares
Date: 03/28/15 Time: 12:24
Sample (adjusted): 2009M04 2014M12
Included observations: 69 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

LOG(PAYE(-1)) -0.417955 0.073486 -5.687577 0.0000

D(LOG(PAYE(-1))) -0.205948 0.080079 -2.571822 0.0124
D(LOG(PAYE(-2))) -0.087876 0.082141 -1.069823 0.2887
C 7.133519 1.234148 5.780118 0.0000
@TREND(2009M01) 0.007389 0.002091 3.533192 0.0008

R-squared 0.369927 Mean dependent var 0.043919

Adjusted R-squared 0.330547 S.D. dependent var 0.235725
S.E. of regression 0.192870 Akaike info criterion -0.383892
Sum squared resid 2.380737 Schwarz criterion -0.222000
Log likelihood 18.24426 Hannan-Quinn criter. -0.319664
F-statistic 9.393870 Durbin-Watson stat 1.996998
Prob(F-statistic) 0.000005

Appendix 2: Buoyancy Model Results

69
Dependent Variable: LOG(PAYE)

Method: Least Squares

Date: 03/28/15 Time: 12:29

Sample: 2009M01 2014M12

Included observations: 72

Variable Coefficient Std. Error t-Statistic Prob.

C -51.99395 4.237866 -12.26890 0.0000

LOG(GDP) 2.012222 0.183779 16.39046 0.0000

R-squared 0.793295 Mean dependent var 17.46175

Adjusted R-squared 0.790342 S.D. dependent var 0.928576

S.E. of regression 0.425180 Akaike info criterion 1.154777

Sum squared resid 12.65447 Schwarz criterion 1.218018

Log likelihood -39.57199 Hannan-Quinn criter. 1.179954

F-statistic 268.6471 Durbin-Watson stat 2.282313

Prob(F-statistic) 0.000000

Dependent Variable: LOG(VAT)

Method: Least Squares

Date: 03/28/15 Time: 12:25

Sample: 2009M01 2014M12

Included observations: 72

Variable Coefficient Std. Error t-Statistic Prob.

C -34.66805 4.950417 -7.003056 0.0000

LOG(GDP) 1.286807 0.214679 10.65219 0.0000

R-squared 0.618465 Mean dependent var 18.06106

Adjusted R-squared 0.613014 S.D. dependent var 0.798399

S.E. of regression 0.496670 Akaike info criterion 1.465601

70
Sum squared resid 17.26765 Schwarz criterion 1.528842

Log likelihood -50.76165 Hannan-Quinn criter. 1.490778

F-statistic 113.4692 Durbin-Watson stat 1.986574

Prob(F-statistic) 0.000000

Appendix 3: Relationship of VAT, PAYE and Consumer Price Index

Null Hypothesis: D(M) has a unit root

Exogenous: Constant, Linear Trend

Lag Length: 0 (Automatic - based on SIC, maxlag=11)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -15.03805 0.0001

Test critical values: 1% level -4.094550

5% level -3.475305

10% level -3.165046

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(M,2)

Method: Least Squares

Date: 04/15/15 Time: 20:30

Sample (adjusted): 2009M03 2014M12

Included observations: 70 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(M(-1)) -1.542415 0.102568 -15.03805 0.0000

C -0.001272 0.003090 -0.411680 0.6819

71
 @TREND(2009M01) -1.57E-05 7.40E-05 -0.211926 0.8328

R-squared 0.771444 Mean dependent var 5.59E-05

Adjusted R-squared 0.764622 S.D. dependent var 0.025797

S.E. of regression 0.012516 Akaike info criterion -5.881759

Sum squared resid 0.010495 Schwarz criterion -5.785395

Log likelihood 208.8616 Hannan-Quinn criter. -5.843482

F-statistic 113.0727 Durbin-Watson stat 1.949730

Prob(F-statistic) 0.000000

Null Hypothesis: I has a unit root

Exogenous: Constant, Linear Trend

Lag Length: 0 (Automatic - based on SIC, maxlag=11)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -4.332166 0.0050

Test critical values: 1% level -4.092547

5% level -3.474363

10% level -3.164499

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(I)

Method: Least Squares

Date: 04/15/15 Time: 20:28

72
Sample (adjusted): 2009M02 2014M12

Included observations: 71 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

I(-1) -0.354076 0.081732 -4.332166 0.0000

C 0.000816 0.001206 0.676278 0.5012

@TREND(2009M01) -1.03E-05 2.93E-05 -0.350202 0.7273

R-squared 0.225712 Mean dependent var 0.000311

Adjusted R-squared 0.202939 S.D. dependent var 0.005599

S.E. of regression 0.004999 Akaike info criterion -7.717958

Sum squared resid 0.001699 Schwarz criterion -7.622352

Log likelihood 276.9875 Hannan-Quinn criter. -7.679939

F-statistic 9.911318 Durbin-Watson stat 2.360836

Prob(F-statistic) 0.000167

Exogenous: Constant, Linear Trend

Lag Length: 1 (Automatic - based on SIC, maxlag=11)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -9.783802 0.0000

Test critical values: 1% level -4.096614

5% level -3.476275

10% level -3.165610

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(VAT,2)

Method: Least Squares

73
Date: 04/15/15 Time: 20:31

Sample (adjusted): 2009M04 2014M12

Included observations: 69 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(VAT(-1)) -1.663732 0.170050 -9.783802 0.0000

D(VAT(-1),2) 0.192104 0.102282 1.878183 0.0648

C 0.002876 0.002277 1.262946 0.2111

@TREND(2009M01) -5.33E-05 5.35E-05 -0.996872 0.3225

R-squared 0.775079 Mean dependent var -0.000899

Adjusted R-squared 0.764698 S.D. dependent var 0.017910

S.E. of regression 0.008688 Akaike info criterion -6.597589

Sum squared resid 0.004906 Schwarz criterion -6.468075

Log likelihood 231.6168 Hannan-Quinn criter. -6.546206

F-statistic 74.66341 Durbin-Watson stat 2.103826

Prob(F-statistic) 0.000000

Appendix 4: Serial Correniality Tests

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 0.786918 Prob. F(10,57) 0.6411

Obs*R-squared 8.612905 Prob. Chi-Square(10) 0.5692

Test Equation:

Dependent Variable: RESID

Method: Least Squares

Date: 04/22/15 Time: 17:19

Sample: 2009M02 2014M12

74
Included observations: 71

Presample missing value lagged residuals set to zero.

Variable Coefficient Std. Error t-Statistic Prob.

C -25813.12 14159247 -0.001823 0.9986

CONSUMER_PRICE -20414.12 153428.8 -0.133053 0.8946

IMPORTS 8.36E-05 0.007968 0.010495 0.9917

LAG_VAT 0.023516 0.054847 0.428753 0.6697

RESID(-1) -0.075383 0.142714 -0.528212 0.5994

RESID(-2) 0.125078 0.142836 0.875674 0.3849

RESID(-3) 0.028603 0.143920 0.198742 0.8432

RESID(-4) -0.054762 0.147269 -0.371847 0.7114

RESID(-5) -0.357931 0.142793 -2.506650 0.0151

RESID(-6) 0.007667 0.144201 0.053167 0.9578

RESID(-7) 0.047816 0.146121 0.327235 0.7447

RESID(-8) -0.042090 0.146979 -0.286369 0.7756

RESID(-9) -0.035613 0.145956 -0.243995 0.8081

RESID(-10) -0.063487 0.145684 -0.435783 0.6646

R-squared 0.121309 Mean dependent var -1.91E-09

Adjusted R-squared -0.079095 S.D. dependent var 12440345

S.E. of regression 12922967 Akaike info criterion 35.76165

Sum squared resid 9.52E+15 Schwarz criterion 36.20781

Log likelihood -1255.539 Hannan-Quinn criter. 35.93907

F-statistic 0.605322 Durbin-Watson stat 1.929238

Prob(F-statistic) 0.839626

75
Appendix 5: Normality Tests

log VAT=a0 +log CPI +a 1+ log M t +

a)

10
Series: Residuals
Sample 2009M02 2014M12
8 Observations 71

Mean -1.91e-09
6 Median 105635.5
Maximum 30800898
Minimum -26529303
4 Std. Dev. 12440345
Skewness 0.151351
Kurtosis 2.834285
2
Jarque-Bera 0.352309
Probability 0.838488
0
-2.0e+07 -9999975 25.0000 1.0e+07 2.0e+07 3.0e+07

Y
b) log P E=a0 +log CPI +a1 + log X t +

12
Series: PAYE
Sample 2009M01 2014M12
10
Observations 72

8 Mean 48119170
Median 51409941
Maximum 89759220
6 Minimum 556339.9
Std. Dev. 21847067
4 Skewness -0.406550
Kurtosis 2.588793

2 Jarque-Bera 2.490665
Probability 0.287845
0
50 20000050 40000050 60000050 80000050

Appendix 6: VAT versus Imports - Model Results

Dependent Variable: VAT

Method: Least Squares

Date: 04/15/15 Time: 20:34

Sample: 2009M01 2014M12

76
Included observations: 72

Variable Coefficient Std. Error t-Statistic Prob.

C 0.944647 0.003929 240.4028 0.0000

M -0.262623 0.066927 -3.924032 0.0002

I 0.835869 0.197052 4.241875 0.0001

R-squared 0.677845 Mean dependent var 0.930615

Adjusted R-squared 0.559811 S.D. dependent var 0.014927

S.E. of regression 0.011943 Akaike info criterion -5.976547

Sum squared resid 0.009842 Schwarz criterion -5.881686

Log likelihood 218.1557 Hannan-Quinn criter. -5.938782

F-statistic 20.95240 Durbin-Watson stat 1.667041

Prob(F-statistic) 0.000000

Null Hypothesis: PAYE has a unit root

Exogenous: Constant, Linear Trend

Lag Length: 0 (Automatic - based on SIC, maxlag=11)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -4.541351 0.0026

Test critical values: 1% level -4.092547

5% level -3.474363

10% level -3.164499

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

77
Dependent Variable: D(PAYE)

Method: Least Squares

Date: 04/15/15 Time: 20:50

Sample (adjusted): 2009M02 2014M12

Included observations: 71 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

PAYE(-1) -0.413543 0.091062 -4.541351 0.0000

C 0.001144 0.000271 4.223091 0.0001

@TREND(2009M01) 1.89E-05 6.15E-06 3.077012 0.0030

R-squared 0.235517 Mean dependent var 8.92E-05

Adjusted R-squared 0.213032 S.D. dependent var 0.000779

S.E. of regression 0.000691 Akaike info criterion -11.67495

Sum squared resid 3.25E-05 Schwarz criterion -11.57934

Log likelihood 417.4606 Hannan-Quinn criter. -11.63693

F-statistic 10.47448 Durbin-Watson stat 2.245267

Prob(F-statistic) 0.000108

Null Hypothesis: D(X) has a unit root

Exogenous: Constant, Linear Trend

Lag Length: 0 (Automatic - based on SIC, maxlag=11)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -10.98501 0.0000

Test critical values: 1% level -4.094550

5% level -3.475305

78
 10% level -3.165046

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(X,2)

Method: Least Squares

Date: 04/15/15 Time: 20:52

Sample (adjusted): 2009M03 2014M12

Included observations: 70 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

D(X(-1)) -1.285952 0.117064 -10.98501 0.0000

C 0.000678 0.001326 0.511274 0.6108

@TREND(2009M01) -2.56E-05 3.18E-05 -0.804328 0.4241

R-squared 0.642992 Mean dependent var -1.27E-05

Adjusted R-squared 0.632335 S.D. dependent var 0.008849

S.E. of regression 0.005366 Akaike info criterion -7.575627

Sum squared resid 0.001929 Schwarz criterion -7.479263

Log likelihood 268.1469 Hannan-Quinn criter. -7.537350

F-statistic 60.33531 Durbin-Watson stat 2.080127

Prob(F-statistic) 0.000000

Null Hypothesis: I has a unit root

Exogenous: Constant, Linear Trend

Lag Length: 0 (Automatic - based on SIC, maxlag=11)

79
 t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -4.332166 0.0050

Test critical values: 1% level -4.092547

5% level -3.474363

10% level -3.164499

*MacKinnon (1996) one-sided p-values.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(I)

Method: Least Squares

Date: 04/15/15 Time: 20:55

Sample (adjusted): 2009M02 2014M12

Included observations: 71 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

I(-1) -0.354076 0.081732 -4.332166 0.0000

C 0.000816 0.001206 0.676278 0.5012

@TREND(2009M01) -1.03E-05 2.93E-05 -0.350202 0.7273

R-squared 0.225712 Mean dependent var 0.000311

Adjusted R-squared 0.202939 S.D. dependent var 0.005599

S.E. of regression 0.004999 Akaike info criterion -7.717958

Sum squared resid 0.001699 Schwarz criterion -7.622352

Log likelihood 276.9875 Hannan-Quinn criter. -7.679939

F-statistic 9.911318 Durbin-Watson stat 2.360836

Prob(F-statistic) 0.000167

80
Appendix 7: PAYE versus Exports - Model Results

Dependent Variable: D(PAYE)

Method: Least Squares

Date: 04/15/15 Time: 21:00

Sample (adjusted): 2009M04 2014M12

Included observations: 69 after adjustments

D(PAYE) = C(1)*( PAYE(-1) - 0.149525030252*X(-1) + 0.905925315003*I(

-1) - 0.00186870925511 ) + C(2)*D(PAYE(-1)) + C(3)*D(PAYE(-2)) +

C(4)*D(X(-1)) + C(5)*D(X(-2)) + C(6)*D(I(-1)) + C(7)*D(I(-2)) + C(8)

Coefficient Std. Error t-Statistic Prob.

C(1) -0.035555 0.016270 -2.185261 0.0327

C(2) -0.479704 0.116555 -4.115697 0.0001

C(3) -0.403394 0.117754 -3.425726 0.0011

C(4) 0.000508 0.016049 0.031631 0.9749

C(5) 0.008400 0.016084 0.522272 0.6034

C(6) 0.022096 0.016993 1.300313 0.1984

C(7) 0.003441 0.016311 0.210973 0.8336

C(8) 0.000144 8.63E-05 1.674572 0.0991

R-squared 0.289847 Mean dependent var 8.17E-05

Adjusted R-squared 0.208354 S.D. dependent var 0.000787

S.E. of regression 0.000701 Akaike info criterion -11.58077

Sum squared resid 2.99E-05 Schwarz criterion -11.32175

Log likelihood 407.5366 Hannan-Quinn criter. -11.47801

F-statistic 3.556717 Durbin-Watson stat 1.982297

Prob(F-statistic) 0.002861

81
82