The Role of Value-Added Tax Revenue on Gross Domestic Product (GDP) in Tanzania

Abstract

The objective of this study is to examine the role of Value Added Tax (VAT) on the nominal GDP in Tanzania. The study adopted ontology philosophy and quantitative descriptive design. This study used only secondary data which was collected from the Tanzania Revenue Authority (TRA) and Bank of Tanzania financial stability reports for the period of 2015 to 2022. The data was analyzed quantitatively through descriptive statistics and linear regression.  The study findings revealed that the VAT revenue collected by TRA has a significant contribution to the growth of the country’s GDP. When VAT increases by 1 unit, the nominal GDP increases by 9.56348 units and the P- value is less than 5% which indicates statistical significance. The regression results are supported by the descriptive statistics whereby, from 2015 to 2022, domestic VAT and Import VAT were increasing at an increasing rate. This study recommends that the Tanzania Revenue Authority should take all necessary measures to reasonably reduce the VAT rate from 18% to promote the production and supply of goods and services in the market by the existing manufacturers since such a reduction of VAT rate will lead to the reduction of production costs. The reduction of the VAT rate may also lead to an increase in the rate of voluntary tax compliance and a decrease in the prices of goods and services that ultimately boost the consumption of goods and services in the economy. It is further recommended to the government of Tanzania, specifically, the Ministry of Industry, Trade and Investment to improve and further promote its investment policies to attract Foreign Direct Investments (FDIs) into the manufacturing sector since VAT is an input tax and it is charged into the value addition of products during different phases of manufacturing. Thus, growth of the manufacturing sector in the country will mean growth of VAT revenue collections and ultimately GDP growth