Estimation of Elasticity Coefficients of Nepalese Taxation

The concepts of elasticity and buoyancy of taxes are often used in measuring the responsiveness of tax collection with respect to change in GDP or GNP. A high elastic tax system is said to be desirable, but in most of the cases, the major sources of government revenue may have low elasticity in which cases the authorities must seek additional revenue by introducing discretionary changes. Then, growth in tax revenue may come about through high buoyancy as opposed to the natural growth through elasticity (Mansfield, 1972).

The given tax system is said to be elastic if elasticity coefficient exceeds unity, otherwise it is considered as inelastic. To bridge the resource gap in any economy, an elastic tax system is highly advantageous which reduces the probable instability in the economy due to change in tax rates or its legal base. In an attempt to measure revenue productivity of taxes in Nepal, two popular concepts, buoyancy and elasticity, have been estimated for the period under study.

Elasticity measures the automatic response of revenue to income change without the effect of discretionary change in the base, rate, exemptions, etc. Hence elasticity is result of built-in-effects of tax structure. An elasticity of unity implies that one percent change in GDP will be accomplished by one percent change in tax revenue, elasticity greater than unity implies that the percentage change in tax revenue will exceed in GDP. If elasticity is less then unity then tax system is said to be inelastic in nature and implies that one percent change in GDP result less than one percent change in tax revenue.

Therefore, a tax system is said to be elastic if the coefficient exceeds unity, and inelastic if it is less than unity. For economic area, an elastic tax system is highly advantageous for the public expenditure activities, which help to balance between equity, growth and efficiency in an economy. In fact, a developing country would get economic equality, stability and development only when it mobilizes more revenue by adopting an elastic tax system an initial stage of its development movement.

An efficient tax system ought to give better result of elasticity and it should be greater than unity. If the economy develops and trend of GDP growth is seemed to be increasing but tax yield in not increasing along with GDP, then the tax yield will not be enough to fulfill the growing expenditure of the Government. Therefore tax yield should be increasing along with the increase in GDP and hence elastic tax system in needed.

A developing country like Nepal, which is struggling in an initial stage of its development movement should adopt an elastic tax system, collect additional revenue and mobilize that additional revenue to get economic development, stability and equity. The higher tax elastic is desirable because it allows increased revenue mobilization without the need for political difficult to raise tax rate or to introduce new taxes.

If the tax system is elastic then, discretionary change may not be desirable to mobilize additional revenue. However, if the elasticity of tax system is low, Government can always improve the revenue mobilization by introducing discretionary change (i.e. introducing new taxes, increasing tax rates etc.)

The larger is the automatic growth, lesser in the need for discretionary changes to achieve required funding for development. There is greater advantage in making a tax system more and more automatic response type because it is not only minimize tax payer’s residence but also minimize the administrative and political limitations.

The elasticity coefficient of different revenue heads during the period 21 years from fiscal year 1990/91 to 2010/11 has been presented in table 5.1

As shown in the table, during the study period, the elasticity coefficient of total revenue with respect to GDP is found to be 0.56; it implies that one percent increase in GDP causes 0.56 percent increase in total revenue due to the automatic growth. Here coefficient is inelastic in nature, which indicates that the total revenue in not responsive to GDP but positive coefficient reflects that total revenue in our country is positively influenced by GDP.  The high level of (0.984) indicates that 98 percent of total revenue is influenced by GDP. F and T statistics is significant at 0.0 percent level implies that the model is best fitted and relation is reliable. That means the influence of any other independent variable to total revenue is nominal.

Similarly, the elasticity coefficient of total tax revenue with respect to GDP is 0.58 which is also inelastic in nature, indicates that the total tax revenue is also not responsive to GDP but its positive value reflects that total tax revenue in our country is positively influenced by GDP and it means that one percent increase in nominal GDP causes 0.58 percent increase in total tax revenue. Here, total tax revenue is inelastic in nature, which implies that the lesser the automatic growth and larger the need for discretionary change to achieve required funding for development from taxation.

The value of (0.907) indicates that 90 percent of total revenue is influenced by GDP. F and T statistics is significant at 0.0 percent level implies that the model is best fitted and relation is reliable.

Similarly, the elasticity coefficient of total non-tax revenue is (0.47) followed by that of direct tax (0.68), indirect tax (0.55), income tax (0.63), VAT (0.59), custom duties (0.69), import duties (0.58), export duties (-0.20), excise duties (0.43).

During the study period, the elasticity of all the revenue heads is less then unity which shows that Nepalese tax structure as a whole could not be considered elastic and the  automatic growth of revenue is not sufficient of fulfill the required fund of the Government.

The negative elasticity of export duties (-0.20) shows that the automatic mechanism has negative impact. The negative association of export duties implies that every one percent increase in national income decrease the export duties by (0.20) percent.

If we compare total direct tax and total indirect tax, the elasticity coefficient of direct tax (0.68) is greater than that of indirect tax (0.55), which implies that direct tax has been more responsive as compare to indirect tax.

The adjusted coefficient of Determination of various revenue headings except export duties ranges from 0.79 to 0.93 which suggests that there is high degree of association between these revenue headings and the change in GDP but that of export duties (0.091) shows that low degree of association.

F and t statistic of elasticity coefficient of different revenue heads are found to be significant at 0.00 percent which implies that the models are best fitted and the relationship between them and GDP is reliable but the statistic of export duties is found to significant at 1 percent level.

 Estimation of Buoyancy coefficient of Nepalese Taxation

The important objective of this study is to measure the responsiveness and productivity of Nepalese tax system. This objective can be accomplished by estimating the elasticity and buoyancy coefficient of various actual revenue series with respect to GDP.  An elastic tax system is desirable but if tax system is inelastic in nature then discretionary change may be desirable to mobilize additional revenue. Buoyancy is nothing but traditional income elasticity and can be defined as the relative change in gross or actual revenue series due to the relative change in GDP. Further, buoyancy coefficient of a tax system reflects change in revenue collection due to two factors viz. automatic growth and discretionary change. Therefore, the buoyancy coefficient of a tax is given revenue to the percentage change in national income.

Buoyancy measure the total response of particular revenue heads to change in GDP including the effect of discretionary changes. If the value of buoyancy coefficient is seemed to be greater than unity, we can conclude that the particular revenue heads is buoyant.

The buoyancy coefficient of different revenue heads during the period of 21 years from fiscal year 1090/91 to 2010/11 has been presents in table 5.2

As shown in the table, during the study period, the buoyancy coefficient of total revenue with respect to GDP is found to be 1.23, which implies that one percent increase in national income is accompanied by 1.23 percent increase in total revenue collection including automatic growth and discretionary changes. Here, the value of buoyancy coefficient is greater than unity, which indicate that total revenue of Nepalese tax structure for the study period is found to be buoyant.

The buoyancy coefficient is significant at 0.00 percent level. The adjusted Coefficient of Determination (0.99) indicates that 99 percent of total revenue is influenced by GDP and influence of any other variable to total revenue is nominal hence the relationship between total revenue and GDP holds good. F and T statistic are significant at 0.00 percent level, which indicates that the equation is best fitted and relation are reliable.

Similarly, the buoyancy coefficient of all major tax heads and non tax revenue are found to be greater than unity except export duties (0.85). The buoyancy coefficient of tax revenue, non-tax revenue, direct tax, indirect tax, income tax, VAT, custom duties, import duties and excise duties are found 1.28, 1.06, 1.52, 1.20, 1.61, 1.41, 1.04, 1.02, and 1.38 respectively.

This high buoyancy but low elasticity of all major tax and non-tax heads signifies the additional governmental efforts of changing the base and the rate structure to increase revenue.

In all the major tax and non-tax revenue heads the buoyancy coefficient of income tax is the highest (1.61). This implies that one percent increase in GDP is followed by 1.61 percent increase in income tax. As income tax is the major component of direct tax, better prospects of Nepalese tax system can be hoped through direct taxation, which is considered helpful to reduced unequal distribution of income and wealth.

The coefficient of determination () of all major heads ranges from 0.96 to 0.99 except export duties (0.59).This suggest that there is high degree of association between these revenue heads and the change in GDP. But the degree of association of excise duties and change in GDP is seemed to be low.

F and T statistics suggests that the model of all major revenue heads are significant at 0.00 percent levels, which implies that model, is best fitted and the relationship is reliable. Standard error shows that all the coefficients are statistically significant.

After analyzing the Nepalese tax structure during the 21 years study period from 1990/91 to 2010/11, it can be conclude that the elasticity coefficient of different revenue heads are very low (inelastic) in Nepalese economy as compare to their  respective buoyancy coefficient.

This high value of discretionary measure indicates that frequent changes in a tax rates and introducing new taxes to improve revenue mobilization in our country Nepal.

Before restriction of democracy (before 1990) land tax was the major source of the Government revenue. After restriction of democracy the share of land tax was continuously decline in total revenue mobilization. In fiscal year 2002/03 share of land tax was zero in total tax revenue. After this year the Government of Nepal has not imposed the land tax. Specially, land tax was imposed by the local government. Therefore in our present study; we can not calculate the elasticity and buoyancy coefficient of land tax with respect to GDP. Since, in present situation share of land is zero in total revenue mobilization. So that increase in GDP has no significant effect in land tax revenue. In other worlds, there is no relationship between increasing GDP and land tax revenue. So, we avoid the calculation of elasticity and buoyancy coefficient of land tax in our present study.

The overall analysis shows that there is less elastic and more buoyant tax system in Nepalese economy. The present study shows the increasing trend of discretionary effect except few tax heads, to draw Government revenue. This indicates additional efforts of Government in tax structure. The higher discretionary effect signifies more burdens to the taxpayers, which is not suitable on the ground of equity and progressiveness .The less elastic tax system causes many problem like lack of revenue surplus for development, widening resource gap, etc. To bridge the gap, there is increasing reliance on foreign loan which is not in favor of the country. So the Government has to focus on the implementation of policies to raise the Government revenue by automatic response of tax system rather than that of discretionary efforts. Through it is also a suitable part of increasing revenue.