Buoyancy and Elasticity of VAT on Nepalese Economy

Abstract

This study examines the buoyancy and elasticity of V AT in the Nepalese economy by shifting the conventional responsiveness framework toward an endogenous-growth perspective that evaluates how V AT mobilization relates to aggregate real GDP while controlling for exchange rate, remittance, market capitalization, money supply, and government spending. Using annual time-series data for fiscal years 2003/04–2022/23 compiled from Government of Nepal Economic Surveys, all variables were converted to constant prices using the GDP deflator (base year 2013/14), transformed into log-linear form, and assessed for stationarity and classical assumptions. The preferred model exhibited strong explanatory power (adjusted R² ≈ 0.814), acceptable serial-correlation and heteroskedasticity properties, no structural break, and no multicollinearity (VIF < 10), supporting long- and short-run inference. V AT showed a positive and statistically meaningful association with real GDP: a 1% rise in V AT corresponded to a 0.427% increase in real GDP in the short run and 0.46% in the long run, indicating modest but sustained marginal productivity of V AT. Descriptive evidence further showed Nepal’s heavy reliance on indirect taxes (average share 58.87% of total revenue) and a fluctuating V AT share; after V AT adoption (1997/98–2016/17) V AT rose only sixfold and averaged 27.58% of total revenue, only 0.93 percentage points higher than the replaced taxes pre-V AT, implying implementation gaps. Overall, results suggest V AT supports growth but exhibits low long-run buoyancy/elasticity, underscoring the need for targeted reforms to strengthen V AT administration, compliance, and revenue efficiency.