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Impact of tax revenue on economic growth in Rwanda from 2007-2017


par Etienne NZABIRINDA
UR - Masters 2019
  

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ABSTRACT

Rwanda is working tirelessly to achieve economic growth and development. Taxation effective is the one tool to promote and to accelerate economic growth and development, several studies analyses the impact of tax on economic growth and economic development.

The objective of this study is to investigate the impact of tax revenue on economic growth in Rwanda from 2007-2017. Secondary data were sourced from Rwanda Revenue Authority (RRA) and National Institute of statistics of Rwanda (NISR) for the period spanning from 2007Q1-2017Q4. Descriptive data analysis was used and the variable considered here are: Gross domestic product (GDP) as proxy for economic growth, direct tax (DT), Tax on goods and services (TGS) and Tax on international trade and transaction (TITT). Significant literature review for this study is available.

The results of the unit root and the co-integration tests revealed that all variables are integrated of order one, I(1) and Johensen cointegration test indicate existence of a long-run equilibrium relationship among variables included in the model and we use also Vector Error Correction Model (VECM) estimation method for data analysis to estimate for short run result. The empirical findings showed that direct tax(DT)and tax on goods and services(TGS) variables have positive at 0.1631 to 0.60 31 respectively impact on economic growth, while Tax on international trade and transactions(TITT) variable has negative at -0.005913 and it impacts on economic growth.

This study recommends that the policymakers within government of Rwanda must improve both direct tax and tax on goods and services (domestic tax) and increase Taxes on international trade transactions (customs duties), it will harm economic growth of Rwanda therefore custom duties must be rationally reduced or abolished and free trade zones like Africa continental free trade area (AfCFTA) must create to foster increased exchange of goods and services across borders.

Key Words: Tax Revenue, economic growth, Gross domestic product, direct tax, tax on goods and services, tax on international trade and transaction, VECM, Rwanda.

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CHAPTER-1 INTRODUCTION

1.1. BACKGROUND OF STUDY

Rwanda embraced economic growth, the power of any country in economic growth and development is mainly depends on level of amount of tax revenue generated to make economy more advanced.

Bruce et al (2006) point out that generating sufficient revenue to finance government service delivery is the most important function of a tax system. The government has to provide many goods and services to its citizens such as health, education, and defense of the country, maintenance of law and order and management of the economy.

Mustafa (2000) observes that as the economy grows, more people and companies derive higher income and would therefore be liable to pay higher taxes. Tax elasticity is an indicator of measuring the efficiency and responsiveness of tax revenue mobilization in response to growth in the tax base, GDP or national income. A tax is said to be elastic if tax revenues increases more than proportionately in response to a rise in the tax base. If the tax revenue shows less responsiveness to tax base, that type of tax base fails to generate enough revenue for the government in the long run.

In line with its mandate of assessing, collecting, and accounting for tax, customs and other specified non tax revenues, assisting taxpayers in understanding and meeting their tax obligations thus raising their compliance, Rwanda Revenue Authority also analyses long-term tax elasticity of tax in relation to changes in GDP in order to highlight tax gaps within a sector .

It is also in this framework that profitability benchmarking based on business activities has to be done in order to identify areas of irregularities in tax compliance hence taking actions for tax collection optimization.

According to Azubike (2009), tax is a major player in every society of the world.Taxation is most way to reduce foreign aid by mobilizing internal government resource which lead to favorable conductive environment which lead to economic growth promotion.

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Nzotta (2007) argues that taxes constitute key sources of revenue to the federation account shared by the federal, state and local governments.

That is why taxation system in Rwanda is divided into decentralized tax and fiscal tax and others administrative fees from Rwanda online known as Irembo.

Oxford Dictionary of Accounting (1995) defined taxation as a levy on an individual or corporate body by the central or local government to finance the expenditure of that government and also as a means of implementing its fiscal policy.

Abomaye-Nimenibo(2017) is of the view that tax is a compulsory contributions made by animate and inanimate beings to government being a higher authority either directly or indirectly to fund its various activities and any refusal is meted with appropriate punishment. He went on to say that Tax is an involuntary payment made by a resident of a state in obeisance to levy imposed by a constituted authority of a sovereign state at a particular period of time; and that Taxation is the process put in place by government (which ever tier) to exercise authority on and over the imposition and collection of taxes based on enacted tax laws with which projects are financed. Taxation is therefore seen as the transfer of resources as income from the private sector to the public sector for its utilization to achieve some if not all the nation's economic and social goals such as provision of basic amenities, social services, educational facilities, public health, transportation, capital formation etc.

However ,one of main function of government is to infrastructure service development generation such as roads, schools, hospitals ,defense, pipe-borne water,... as well as ensure the rise of per capita income and to achieve other macroeconomic factors such low unemployment, inflation, Balanced of problem balance ,Economic growth, to reduce income inequality,..

For above service and argument to be efficient at optimum level, government need sufficient resource to finance them. The task of financing government expenditure and allocating national resource is main responsibilities and challenges due to limited government resources .therefore individuals, companies and government body must provide tax based on Rwanda taxation law. Government always think how to modernized tax revenue by reforming law . These law aim to ensure to promote tax compliance and to discourage tax evasion and tax

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avoidance. The purpose of this study is to show the impact of aid on economic development of Rwanda

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"La première panacée d'une nation mal gouvernée est l'inflation monétaire, la seconde, c'est la guerre. Tous deux apportent une prospérité temporaire, tous deux apportent une ruine permanente. Mais tous deux sont le refuge des opportunistes politiques et économiques"   Hemingway