Macro-economic determinants of tax revenue in India: An application of dynamic simultaneous equation model

Abstract

Due to its recurrent and mandatory nature, the tax becomes a crucial instrument for revenue generation and resource mobilisation. Excessive dependence on foreign finance by any country could lead to a debt trap in the long run. Therefore, it is become obvious to strengthen tax revenue performance for a country. This study tries to find major macro-economic determinants of tax revenue performance in India for the period 1981 to 2016 based on the availability of data. We propose a dynamic simultaneous equation model for the study. Empirical results suggest that growth, aid and trade are positively enlarging tax revenues. And inflation, development expenditure and agriculture contribution come out to be detrimental factors for tax revenues performance. Use of dynamic three-stage least square estimator helps us to trace possible channels through which tax revenue performance can be improved.