https://doi.org/10.52131/joe.2023.0504.

0184
iRASD Journal of Economics

Volume 5, Number 4, 2023, Pages, Pages 1130 – 1146

Journal Home Page:

https://journals.internationalrasd.org/index.php/joe
Examining the Influence of Direct and Indirect Taxation on Economic
Growth: A Case Study of Pakistan
Nasir Munir1 , Malik Saqib Ali2 , Azra Nasir3
1
Assistant Professor Economics at SZABIST University Islamabad, Pakistan. Email: [email protected]
2
Assistant Professor Economics at NUML Islamabad, Pakistan. Email: [email protected]
3
Assistant Professor Economics at NUML Islamabad, Pakistan. Email: [email protected]

ARTICLE INFO ABSTRACT

Article History: Taxation and expenditure administration represents a significant
Received: September 10, 2023 concern for governments at all levels. Taxation plays a crucial
Revised: December 27, 2023 role in the funding and formulation of economic policies. This
Accepted: December 28, 2023 study undertakes a comparative analysis of Pakistan's direct
Available Online: December 31, 2023 and indirect taxation systems, their impact on economic
progress, and their relationship with inflation. The available data
Keywords:
Direct Tax indicate that the impact of indirect taxes on economic growth is
more significant compared to that of direct taxes. More
Indirect tax precisely, a rise of one percent in indirect taxation results in a
Economic growth corresponding increase of 0.49% in GDP, while direct taxation
JEL Classification Codes: leads to a GDP increase of 0.22%. Indirect taxes have a greater
H11, H21, H24 impact on inflation compared to direct taxes. It is recommended
to consider long-term planning, expanding the tax base,
Funding:
reducing tax evasion, and enhancing the efficiency of the tax
This research received no specific grant
mix strategy. Indirect taxation has the potential to mitigate
from any funding agency in the public,
wealth inequality and foster economic growth. Tax and
commercial, or not-for-profit sectors.
monetary policy have the potential to reduce inflation levels.

© 2023 The Authors, Published by iRASD. This is an Open Access Article

under the Creative Common Attribution Non-Commercial 4.0
Corresponding Author’s Email: [email protected]
Citation: Munir, N., Ali, M. S., & Nasir, A. (2023). Examining the Influence of Direct and Indirect Taxation
on Economic Growth: A Case Study of Pakistan. IRASD Journal of Economics, 5(4), 1130–1146.
https://doi.org/10.52131/joe.2023.0504.0184

1. Introduction

Government revenue is important and recognized globally. Governments globally invest

in public development in social security, defense, law enforcement, and utilities like water, gas,
electricity, transportation infrastructure, and nuclear power. Thus, public finance manages
government revenue and expenditures. Federal, provincial, regional, and local financial
systems contain tax and non-tax revenue streams. Taxes are the main source of government
money, which is used to create economic policies and improve the state. Establishing and
implementing a tax structure and technique is crucial to global competitiveness. Economists
and scholars, including Thomas, view taxes as mandatory financial payments to the
government rather than remunerations for specified services. Taxes are mandatory financial
contributions made by residents of a jurisdiction to the ruling authority to fund the state's
welfare and economic endeavors.

All nations get their money from taxes on individuals, corporations, and investors. In
their research, Aamir et al. (2011) discusses the Four R's: Revenue, Redistribution, Reprising,
and Representation. Redistribution involves transferring money from wealthy to poor people,

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while revenue is how the government gets money. Reprising involves hazardous object costs,
whereas Representation involves government transparency. Progressive, regressive, and
proportional taxes create income and consumption inequities. Two types of taxes exist: direct
and indirect. Direct taxes affect the taxpayer, while indirect taxes affect others. Sales tax, VAT,
excise and customs charges, and tariffs are indirect taxes, according to (Bofah, 2003).
However, direct taxes include income, wealth, and property taxes.

Taxation aims to maximise income and minimise distortions. Governments raise

revenue through direct and indirect taxation despite political resistance. Taxes greatly affect
growth. Public income collection and economic growth depend on them. National economic
competitiveness depends on tax policies. Taxation and economic growth were explored by
(Mashkoor, Yahya, & Ali, 2010). Company priorities include revenue maximisation. Companies
can optimise by reducing expenses or increasing output. The company maximises output-cost
differential in both cases. Company productivity is affected by government regulations,
especially taxes. Thus, policies impact business decisions. Per Hussain (2005), indirect taxes
like excise duty and sales tax affect producer production and resource allocation. A gap exists
between needed and supplied goods and services. Taxes impact manufacturing and
distribution. Consumers benefit and suffer from direct and indirect taxation (Esmaeel, 2013).
Labor-capital income distribution influences productivity. Growing production and worldwide
trade have shown how endogenous forces drive output growth (Pereira, Temouri, Jones, &
Malik, 2019).

A nation's tax system should reflect its economy, tax capacity, and public service
demand. A country's tax system is influenced by its neighbours' economies, histories, and
taxes. Some nations have considerably boosted their tax rates, while others have kept them.
France and Britain adopted VAT in the 1960s, whereas the US taxed corporations. Engen and
Skinner (1996) say indirect taxation grew the economy quicker than direct taxation. Taxes
changed. Consumer taxes are rising 30–40% due to VAT. According to Ebrill, Keen, Bodin, and
Perry (2001), 70% of the world's population lives in VAT-implemented countries.

Tax policy and economic growth are studied using growth models and tax legislation.
Neoclassical (Solow) and endogenous growth theories were presented. Labour and technology
are exogenous in Solow's neoclassical growth model. Solow (1956) believed tax policy did not
affect economic growth long-term. The endogenous growth theory says internal economic
variables drive growth. Tax policy impacts long-term economic growth, says (P. Romer, 1994).
Tax policy can limit economic growth if output rises. Reduced taxes can promote demand and
help the economy recover from recession. C. D. Romer and Romer (2010) believe taxes
increase long-term growth. Scholars discuss tax and policy effects on growth. Savings and
investment taxes may hinder growth. High investment taxes may reduce saving and investing.
An additional tax on investors and low-savers may hinder productivity and economic growth.
Harberger (1962) found that negative tax cuts or subsidies promote R&D. R&D investment
distortion is reduced by business tax cuts, enhancing economic growth.

Savings and investment are affected by direct and indirect taxation, but economic
growth is affected by many other factors. Some themes of interest are consumption, trade,
liberalisation, and exchange rate. Long-term direct and indirect taxes affect these
characteristics differently. N. Ahmad, Ahmad, and Yasmeen (2013) state that taxation affects
several economic activities, including production and distribution. Direct and indirect taxation
affect customers differently and have pros and cons Esmaeel (2013).

The persistence phenomena Inflation changes the economy and ignores revenue to
continue growth (Bleaney, 1999; P. Romer, 1993). Inflation can damage government liabilities
if not addressed. Thus, previous pricing situations may or may not encourage inflation to boost
income. Academics view inflation as a policy variable, and an inflation tax is an alternative to
traditional taxes. Both revenue streams incur expenses, but governments use fiscal policy.

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Poterba and Rotemberg (1988) state that optimum taxation theory states that tax rates
increase inflation.

Taxes impact fiscal policy and aggregate demand. Taxation boosts GDP in expansionary
and contractionary fiscal policies. Shocks kill tax cuts and expansionary fiscal plans. The 2007–
2009 US financial crisis increased deficits and debt. After decades of deficit reduction, many
OECD countries experienced fiscal imbalances. Tax reforms encourage innovation and
entrepreneurship. Tax policies effect growth differently based on productivity and progress.
Fiscal policy stabilises and mobilises developing nations. Direct taxes account for 20-40% of
revenue, whereas indirect taxes account for 80-90%. Tax advantages increase resource
investment. Developing nations tax differently. Direct and indirect taxes account for 66% of
developing nation taxation. Tax reforms hamper growth. Taxed nations shrink. Pakistan's
Federal Board of Revenue collects taxes and nontaxes. Taxation is hot due of Pakistan's low
GDP. Taxes impact production, savings, investment, consumption, and trade.

Pakistan heavily taxes indirectly, distorting classifications. Economic problems and rising
foreign debts caused a fiscal imbalance. Pakistan has a 10–12% tax-to-GDP ratio. However,
efforts are underway to raise it. Fiscal policy shapes Pakistan's economy. The tax system fails
due to mismanagement of revenue and spending. Security and politics threaten fiscal stability.
Yearly budgets include economic stimulants and subsidies. Pakistan's tax-to-GDP ratio is 42%
direct and 41.7% indirect (sales tax). Pakistan's fiscal and monetary policies raise inflation
above GDP. Recent decreases don't stop inflation.

Pakistan is improving its tax and budgetary systems to sustain growth despite major
economic constraints. The global economy and Pakistan's rapid tax income rise raise concerns
about direct and indirect taxation's effects on economic growth. The nation prioritises economic
prosperity and independence. Recent tax revenue swing? Direct or indirect taxes? Trend in
inflation? Indirect and direct taxes affect inflation.

This study first examines direct and indirect taxation on economic growth. This involves
analysing how personal income tax, corporate income tax, product and service taxes, and
natural resource revenues affect economic growth. In addition, direct and indirect taxes must
be examined on macroeconomic indicators, particularly inflation. This study examines how
taxes affect inflation, prices, consumer behaviour, and market dynamics. In conclusion, this
paper uses empirical data to promote direct and indirect tax policies. This report advises
policymakers on tax structure optimisation, compliance, and sustained economic growth. Our
goal is to better understand the relationship between taxation, economic growth, and
macroeconomic indicators to influence policy and promote economic growth.

2. Review of Literature

Ojong, Anthony, and Arikpo (2016) analysed tax revenue's impact on Nigeria's economy
from 1986 to 2010. They studied corporation income tax and non-oil revenue's effects on
Nigeria's economy. Multiple regression models were tested using OLS to determine the
dependent-independent connection. Their research shows that petroleum profit tax boosts
Nigerian economic growth. No meaningful association exists between corporation income tax
and Nigerian economic growth. In their study on the Turkish economy, Korkmaz, Yilgor, and
Aksoy (2019) discovered that taxes have a strong and negative correlation with economic
growth.

According to Widmalm's study in 2001, there is an inverse correlation between direct

income taxes and economic growth. Nevertheless, the impact of indirect taxes on economic
growth remains unverified. The aforementioned finding is subsequently corroborated by a
recent study conducted in Tanzania Maganya (2020) and another study conducted in Jordan

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(Mdanat et al., 2018). Mdanat et al. (2018) examined the tax system in Jordan and its impact
on economic growth from 1980 to 2015 using error correcting techniques. Their study
presented empirical evidence indicating that the direct and indirect tax structure is inadequate
in promoting economic growth in Jordan, especially during periods of weak budgetary
performance. Moreover, Jordan possesses an ineffective fiscal framework that should compel
legislators to prioritise enhancing the GDP per capita by addressing the significance of
consumption taxes and customs charges. They held the belief that sustained economic
progress could only be attained through the reduction of poverty and inequities, as well as the
improvement of living conditions.

In Pakistan, S. Ahmad, Sial, and Ahmad (2018) conducted a study to analyse the
correlation between total tax receipts and economic growth. They used annual time series data
from 1974 to 2010. The ARDL bounds testing approach for co-integration was utilised to assess
the enduring and immediate link between the variables. The findings indicate that overall tax
revenues exert a detrimental and statistically significant impact on long-term economic growth.
According to the finding, a 1% increase in overall taxes would result in a 1.25% decrease in
economic growth. Thaçi and Gërxhaliu (2021) conducted research on emerging nations and
presented evidence supporting the negative correlation between taxation and economic
growth. Shahmoradi, Mohamadi Molgharni, and Moayri (2019) found that developed countries
exhibit a notable and adverse correlation between the tax revenue-to-Gross Domestic Product
ratio.

The study conducted by Tahir, Ali, Ismail, and Hanan (2014) investigated the impact of
taxes on the textile sector. The researcher employed secondary data and utilised two models to
ascertain that the imposition of excise duty positively impacted the expansion of the textile
industry. Conversely, the application of custom duty was shown to have no discernible effect
on textile growth, while the implementation of direct tax was seen to have a negative impact,
leading to a decline in growth. The findings indicate that there is a need for enhancements in
tax incentive schemes. The economy of Pakistan necessitates the establishment of a
comprehensive system of direct and indirect taxation, including the imposition of indirect taxes
on goods and services.

Canavire-Bacarreza, Martinez-Vazquez, and Vulovic (2013) examined how personal

income tax, corporate income tax, general taxes on goods and services, and natural resource
export earnings affected Latin American economies from 1990 to 2009. The researchers used
vector autoregressive (VAR) methods to study Latin American impacts. They also used the
generalized method of moments (GMM) to analyze a larger sample of developing and
developed nations. The study found that Latin America's low personal income tax collection
rates had no effect on economic growth. However, improving corporate income tax compliance
and revenue collection may boost economic growth. This is especially true for Argentina,
Mexico, and Chile, which export natural resources. The study also found that Latin American
nations' consumption taxes helped their economies

Tax benefits in Ugandan industrial enterprises were examined by Mayende (2013).

Manufacturing performance can be assessed using panel data to estimate gross sales and
value-added. According to study, enterprises that receive tax advantages had larger gross
sales than value-added firms. Optimizing tax incentives through simplification can boost
manufacturing performance. In addition to technical education, skills development, and
manager and management competency, the tax incentive improves performance.

N. Ahmad et al. (2013) suggested direct taxation for progressive Revenue in

industrialized nations. Business indirect taxation is worse in poorer countries like Pakistan. He
experimentally examined Pakistan's economic growth and taxation. GDP was dependent, taxes,
exchange rate, life expectancy, and trade liberalization independent. Taxes and exchange rates

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negatively affected economic Growth, whereas life expectancy and commerce had beneficial
effects.

Ogbonna and Ebimobowei (2012) evaluated Nigeria's 1994–2009 economic

development and tax reforms. He employed secondary data and descriptive and econometric
research to set the goal. Tax changes and granger caused Nigeria's economic Growth. Ogbonna
and Ebimobowei found that taxation sector reforms boost economic Growth, revenue-
generating machinery, and administration to start socially needed expenditure, real production
growth, and per capita. He further advised that these tax policies are not sustainable for
economic Growth without corrupt-free and efficient tax administration. Many theoretical studies
have employed endogenous growth models to promote economic growth tax reforms,
according to (Engen & Skinner, 1996). All of these analyses found that tax distortions would
boost Growth.

Acosta-Ormaechea and Yoo (2012) examined long-term tax mix and economic Growth
in 69 nations. They used 1970–2009 complete cross-sectional data. 21 high-income, 23
middle-income and 25 low-income nations comprise these 69 complete cross-sectional
countries. These countries found that higher income taxes and lower consumption and personal
taxes lowered Growth over time. Income taxation, social security benefits, and personal wealth
taxes are negatively associated with Growth than corporate taxes; shifting taxes from income
to personal and property taxes showed strong positive correlation; and decreasing income
taxes while increasing sales and value added taxes accelerated Growth.

Ilaboya and Mgbame (2012) employed the auto regressive distributed lag model (ARDL)
on Nigerian time series data to compare developing countries. After diagnostic tests, he used
cointegration and error correction to assess short- and long-term model suitability. The indirect
tax had a negative and insignificant effect on economic Growth. The total tax ratio to federal
Revenue has a substantial t-value (19.92) and positive coefficient (2.08). The computed
findings showed that Nigeria should change from indirect tax as a growth driver.

The study conducted by Mutaşcu and Dănuleţiu (2011) investigated the relationship
between taxes and economic growth by employing the Vector Autoregressive Model (VAR) on a
time series dataset spanning from 1999 to 2010. In the context of Romania, there exists a
reciprocal relationship between economic growth and taxation. The findings suggest that it is
advisable to exercise caution in implementing an excessively stringent tax policy in Romania,
as there are various factors that can exert an influence on its effectiveness. The study
conducted by Taha, Nanthakumar, and Colombage (2011) investigated the economic growth of
Malaysia from 1970 to 2009, as well as the corresponding government tax income. Taxes have
a significant impact on the allocation of resources and the overall economic growth. The
present analysis has identified a unidirectional association between economic growth and total
tax income generated by the government. Furthermore, it has been determined that a pace of
adjustment of 21% is required to attain equilibrium when transitioning from the short run to
the long run.

The study conducted by Stoilova and Patonov (2020) investigated alterations in the
distribution of basic tax burden across 27 European countries between the years 1995 and
2010. A comparative analysis was conducted to assess the tax-to-GDP ratio among different
nations. The categorization of total tax revenue into direct, indirect, and social security
contributions serves as a means to delineate the tax system. The focus of regression analysis
lies in examining the impact of taxation on economic growth. The researchers discovered that
the implementation of direct taxation is more equitable and conducive to fostering economic
growth in Europe.

The tax determinants in Pakistan and India were empirically explored by Aamir et al.
(2011). Both nations utilized the regression model and conventional least square methodology.

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The data utilized in this study spans from the academic years 1999-2000 to 2008-2009, and
has been sourced from many reliable sources in both nations. The coefficient of the regression
model indicates that Pakistan generates a higher amount of indirect tax revenue compared to
India. Both nations possess distinct tax systems and institutions. Indirect taxation has been
found to exacerbate socioeconomic inequality and perpetuate labor exploitation. In their study,
Azeem, Saqi, Mushtaq, and Samie (2013) employed a dataset spanning the years 1975 to
2010 to analyze the factors influencing tax income in Pakistan in the context of trade
liberalization, specifically focusing on free trade. The econometric model examining the
relationship between tax revenue and free trade revealed a negative correlation between
exchange rate and population with tax revenue. The process of urbanization has been found to
have a positive impact on tax income. Additionally, it is suggested that the utilization of trade
liberalization be incorporated in the formulation of monetary and fiscal policy.

3. Materials and Methods

This section provides an overview of the study's methodology and data gathering
procedures employed to assess the impact of indirect and direct taxes on economic growth and
key macroeconomic indicators. The primary objective of this study is to analyse the effects of
direct and indirect taxation on the economic development of Pakistan, with a particular
emphasis on their impact on inflation and other key economic indicators. The study will
investigate the implications of both direct and indirect taxation on the economic progress of
Pakistan. This examination will include a variety of direct taxes, such as income tax,
corporation tax, wealth tax, gift tax, inheritance duty, and worker's welfare tax, along with
numerous indirect taxes, including customs duties, federal excise duties, sales tax, surcharges,
and non-judicial stamp duties. The material provided in this context originates from the
(Kamran, Syed, Amin, & Ali, 2014). Indirect taxes encompass the entirety of the
aforementioned. This category encompasses sales tax, surcharges, and non-judicial stamp
taxes.The quantification of economic growth relies on the gross domestic product (GDP) as the
dependent variable, whereas the elements of direct and indirect taxes are considered
independent variables. The present study employs secondary data spanning the years 1979 to
2021 for its quantitative analysis.

3.1. General form of the Model

To assess the influence of direct and indirect taxation on the economic growth of
Pakistan, the Cobb-Douglas production function is employed. Additionally, a simple regression
model is utilized in the second model to examine the relationship. The general form of the
model is presented below:

𝐺𝐷𝑃 = 𝐴(𝐿𝛼 𝐾1 − 𝛼), 𝐶𝑃𝐼 = 𝑓(𝐷𝐼𝑇, 𝐼𝐷𝑇); Whereas;

𝐹𝐷𝑃 = 𝑃𝑒𝑟 𝐶𝑎𝑝𝑖𝑡𝑎 𝐺𝑟𝑜𝑠𝑠 𝐷𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
𝐿 = 𝐿𝑏𝑎𝑜𝑢𝑟 (𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑎𝑛𝑑 𝐾 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 ( 𝐺𝑟𝑜𝑠𝑠 𝐹𝑖𝑥𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐹𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛)

"α" and "1-α" are partial elasticizes relative to variables. "A" is the policy actions
variables, i.e., direct and indirect taxes.

CPI = Consumer Price Index, DIT = Direct Tax, IDT= Indirect Tax

Table 1
Composition of Variables (Independent Variables)
Direct Taxes Indirect Taxes
Income Taxes Custom Duty
Corporation Taxes Federal Excise Duty
Wealth Taxes Value Added Tax
Gift Tax and Estate Duty Sales Tax

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Worker's Welfare Tax Surcharge

Capital Value Tax Stamp-non Judicial
3.2. Econometric Model

To investigate the effect that direct and indirect forms of taxation have on the Gross
Domestic Product (GDP).

For GDP; 𝐿𝑛𝑃𝐶𝐺𝐷𝑃𝑡 = 𝐴 + 𝛼1 𝐿(𝐿)𝑡 + 𝛼2 𝐿𝑛(𝑘)𝑡 + 𝛼3 𝐿𝑛(𝐼𝐷𝑇)𝑡 + 𝛼4 𝐿𝑛(𝐷𝑇)𝑡 + µ𝑡 (1)

To check the impact of direct and indirect taxation on consumer price index (CPI) inflation.

For CPI; 𝐶𝑃𝐼𝑡 = 𝛽𝑜 + 𝛽1 (𝐷𝐼𝑇) + 𝛽2 (𝐼𝐷𝑇)𝑡 + µ𝑡 (2)

3.3. Ordinary Least Square Method

The very important Ordinary Least Square (OLS) method is applied to check the impact
of direct and indirect taxation on economic growth. The least square method has some unique,
best, linear, unbiased estimation properties which have made the most useful and popular
method of regression analysis. While A, α1, α2, α3 and α4 are the regression coefficients of GDP
model with µt random error term. βo, β1 and β2 are the regression coefficients of CPI model
with µt random error term (Gujarati, 2021).

3.4. Method of Analysis

The data analysis aims to investigate how taxes affect economic growth. It is crucial to
consider the intercept value, marked by the letter A, as well as the variable's average value
while time is kept constant, denoted by the letter βo. When performing trend research, treating
time as a constant is unreasonable. The trend line will start above the horizontal line if the
intercept value is positive. The size of the intercept term is determined by the separation
between the trend line's starting point and the horizontal line. Economic significance of
intercept has been unimportant in trend series analysis. The value of alphas and betas
coefficients α1, α2 and α3 and β1, β2 and β3 are known as regression coefficients. These
regression coefficients specify the level to which the value of dependent variables may change
due to one unit change in the value of independent variables. This change may be a positive or
negative numerical value. The slope of a trend line might be steeper or flatter based on the
value of the alpha and beta coefficients, which define their value. The value of coefficients will
be positive if there is a direct relationship and vice versa (Gujarati, 2021). µ is a random
variable known as the error term or disturbance term. The residual term µ demonstrates the
efficiency of all those factors and independent variables which are not involved in the Model.

3.5. Unit Root Test

It is commonly noted that a substantial fraction of time series variables display non-
stationarity at the individual level. This tendency is observed across several contexts. A non-
stationary time series can be identified by the presence of either a non-constant mean, a non-
constant variance, or both of these characteristics. A wide array of formal and informal
approaches can be employed to assess the stationarity of a given phenomenon. The present
study utilizes formal methodologies, specifically the Dickey-Fuller (DF) and Augmented Dickey-
Fuller (ADF) unit root tests. Informal approaches comprise the utilization of graphical analysis
and the study of correlograms through empirical testing. During the course of our inquiry, we
will choose to reject the null hypothesis if the calculated value of the Augmented Dickey Fuller
(ADF) test is lower than the crucial threshold. The empirical findings suggest the presence of a
unit root within the dataset. The concept of stationarity pertains to the property of a
phenomena wherein its characteristics exhibit constancy across time, specifically with regards

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to the mean, variance, and standard deviation, as stated by Dickey and Fuller (1979) and
(Gujarati, 2021). The concept of stationarity pertains to the property wherein parameters stay
invariant or unchanging throughout the course of time.
3.6. Cointegration Regression

When the variables in the model achieve stable behaviour at the first difference,
denoted as I(1), it is common for the time series data to display false or nonsensical
regression. Let us consider a hypothetical scenario where there exists a correlation between
the variables Y and X, both of which are characterised as non-stationary I(1) series. In the
context of regression analysis, it is anticipated that the residuals exhibit stationarity at the
level of integration I(1). In the above scenario, it is deemed that there exists a sustained
association between the variables.

𝑌 = 𝛽𝑜 + 𝛽𝑡 𝑋𝑡 + µ𝑡

3.7. Steps for Augmented Engel Granger Cointegration (AEG) Test

First of all, Null and Alternate hypothesis is made;

Ho: θ = 0 → there is no cointegration.

H1: θ < 0 → there is cointegration.

The following steps are performed in Augmented Engel Granger (AEG) Test;
(1) Take the log of Variables.
(2) Run the separate regression on both models;
(3) 𝐿𝑛𝑃𝐶𝐺𝐷𝑃𝑡 = 𝐴 + 𝛼1 𝐿(𝐿)𝑡 + 𝛼2 𝐿𝑛(𝑘)𝑡 + 𝛼3 𝐿𝑛(𝐼𝐷𝑇)𝑡 + 𝛼4 𝐿𝑛(𝐷𝑇)𝑡 + µ𝑡 (1)
(4) 𝐶𝑃𝐼𝑡 = 𝛽𝑜 + 𝛽1 (𝐷𝐼𝑇) + 𝛽2 (𝐼𝐷𝑇)𝑡 + µ𝑡 (2)
(5) Saved the residuals, ut
(6) Used the estimated in the auxiliary regression model

∆𝑢𝑡 = ⱷ𝑢𝑡−1 + 𝑒𝑡 , Critical Values (Asteriou & Hall, 2021).

3.8. Error Correction Model

Let us consider the scenario where Y and X represent two variables, and they are
integrated at order one (I(1)). In this particular context, the utilisation of an error correction
model (ECM), alternatively known as an error correction mechanism (ECM), can be employed
to investigate the nature of their interaction. This approach incorporates the error term from
the previous regression as a lagged term, and the presence of co-integration serves as
evidence for the existence of a short-term relationship. A general representation of an error
correcting model can be expressed as follows:

∆𝑦𝑡 = 𝜒𝑜 + 𝜒1 ∆𝜒𝑡 – 𝜏𝑢𝑡−1 + €𝑡

Where τ is the error correction term coefficient and shows the speed at which the long-
run disequilibrium is adjusted. This coefficient should be negative (Asteriou & Hall, 2021).

4. Results And Discussion

The main aim of this study endeavor is to examine the effects of both direct and indirect
taxes on the overall economic growth. Through this assessment, we want to determine the
comparative importance of direct taxes in promoting economic growth in relation to indirect
taxes. Numerous factors have been recognized as significant predictors of economic growth,
encompassing gross domestic product (GDP) per capita, the existence of labor and capital,
inflation, the consumer price index (CPI), and both direct and indirect taxation. These several

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factors collectively influence the course of economic development. The analytical phase of this
investigation is comprised of two discrete components. The initial section of the analysis
focuses on the fundamental purpose of direct and indirect taxes in the context of fostering
economic growth. The latter component of this study centers on the secondary aim of direct
and indirect taxes in the context of inflation levels within the Pakistani economy.

4.1. Diagnostic Test for Model – I

Model – I is GDP, where the impact of direct and indirect taxation on Pakistan's economic
Growth is empirically analyzed using the cobb-Douglas production function model.

𝑌 = 𝐴𝐿𝛼 𝐾 1−𝛽

First we determine Y which is our Growth by using Labour and capital as population and
Gross fixed capital formation proxies. A is the efficiency parameter. Direct and indirect taxation
is employed in the Model to check the impact on economic Growth. Various diagnostic tests are
applied on the data set: Stationarity, Normality test, Serial Correlation test, Cointegration test
and Multicollinearity test.

4.2. Stationarity Test

In numerous instances, it is seen that a substantial fraction of time series data

demonstrates non-stationarity, either at the original level or subsequent to the application of
first differencing. The presence of non-stationarity can result in the production of ratios,
statistics, and outcomes that lack significant interpretation or contain errors. The Augmented
Dickey Fuller (ADF) test is frequently utilized to evaluate the stationarity of data and determine
the stationarity of variables. The findings displayed in Table 4.1 demonstrate that the
Augmented Dickey-Fuller (ADF) statistics surpass the critical values at the significance levels of
1%, 5%, and 10%. This implies that all variables lack stationarity at the base level and do not
demonstrate stationarity even after undergoing the first differencing process. Therefore, it is
important to utilize a logarithmic transformation in this specific situation. The variables are
subjected to logarithmic transformations, followed by the subsequent application of the
augmented Dickey-Fuller (ADF) test. The results indicate that, upon applying the first
difference, the series is currently stationary. This suggests that the variables are integrated at
order one, designated as I (1).

Model – I after transformation is;

𝐿𝑛𝑃𝐶𝐺𝐷𝑃𝑡 = 𝐴 + 𝛼1 𝐿(𝐿)𝑡 + 𝛼2 𝐿𝑛(𝑘)𝑡 + 𝛼3 𝐿𝑛(𝐼𝐷𝑇)𝑡 + 𝛼4 𝐿𝑛(𝐷𝑇)𝑡 + µ𝑡

Table 2
ADF Statistic before Transformation (At Level)
Name of Variables ADF Statistics Critical Values
at 1% at 5% at 10%
Per Capita Gross Domestic Product 0.25 -3.63 -2.94 -2.61
Population (L) -1.34 -3.63 -2.94 -2.61
Gross fixed capital formation (K) -0.94 -3.63 -2.94 -2.61
Indirect Tax (IDT) -0.36 -3.63 -2.94 -2.61
Direct Tax (DT) -0.76 -3.63 -2.94 -2.61
Source: Self estimation
Table 3
ADF Statistic after log Transformation (at First Differenced)
Name of Variables ADF Statistics Critical Values
at 1% at 5% at 10%
Per Capita Gross Domestic Product -4.98 -3.63 -2.95 -2.61
Population (L) -6.1 -3.63 -2.95 -2.61

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Gross fixed capital formation (K) -4.81 -3.63 -2.95 -2.61

Indirect Tax (IDT) -6.66 -3.63 -2.95 -2.61
Direct Tax (DT) -4.15 -3.63 -2.95 -2.61
Source: Self Estimation
4.3. Cointegration Test

Variables are classified as co-integrated of order I(1) when a relationship exists between
the dependent and independent variables, and all of these variables demonstrate stationarity
at the first difference, which is represented as I(1). The preceding tables provide compelling
evidence that both the dependent and independent variables demonstrate stationarity when
observed at the first difference. The utilization of integration analysis is being utilized in order
to determine the existence of a persistent relationship between the variables. The objective of
this research entails performing a Simple Ordinary Least Square (OLS) estimation. The
residuals of the Ordinary Least Squares (OLS) model are preserved, and their stationarity is
evaluated by employing the Augmented Dickey Fuller (ADF) test.

The Engel-Granger test is employed to ascertain the stationarity of the error term. All
variables are integrated at the same order, namely order I(1). The error term in a level model
demonstrates stationarity at the level, specifically represented as e(t) (where t denotes time).
Based on the Engel-Granger test, the results of the equation suggest that the observed
relationship is not coincidental and there exists empirical support for cointegration. The results
of the Engel Granger statistics are displayed in Table 4.

Table 4
ADF Statistic for Residual
Name of Variables ADF Statistics Critical Values
at 1% at 5% at 10%
Residual -2.8 -2.63 -1.95 -1.61
Source: Self Estimation

After doing the Augmented Dickey Fuller (ADF) test and Engel Granger test, it has been
established that there is evidence of a long-run relationship in Model - I. The Ordinary Least
Square (OLS) estimation procedure was conducted, and the resulting outcomes are presented
in Table 4.4. The model is considered to be well-specified, as evidenced by the probability
value of the F-statistics being equal to 0.00. The R-squared value indicates that 99.73% of the
variance in the dependent variable, per capita gross domestic product, can be attributed to the
independent variables, namely labour, capital, indirect taxation, and direct taxation, while
holding all other factors constant. Regression model after OLS estimation is;

𝐿𝑛𝑃𝐶𝐺𝐷𝑃𝑡 = −1.09 + 0.17𝐿𝑛(𝐿)𝑡 + 0.12𝐿𝑛(𝑘)𝑡 + 0.49𝐿𝑛(𝐼𝐷𝑇)𝑡 + 0.22𝐿𝑛(𝐷𝑇)𝑡 + µ𝑡

The study utilizes the Cobb-Douglas production function to analyze the impact of both
direct and indirect taxation on the economic growth of Pakistan. The growth is determined by
the utilization of the labor and capital variables, with direct and indirect taxation being the key
variables of interest. The statistic used to measure labor in an economy is the employed
population, while the metric used to measure capital is Gross Fixed Capital Formation. The
labor coefficient demonstrates a positive correlation between labor and per capita gross
domestic product (GDP), with a 1 percent increase in labor being linked to a 0.17 percent
increase in per capita GDP, holding all other variables equal. Similarly, an increase of 1 percent
in capital would lead to a proportional gain of 0.12 percent in per capita gross domestic
output.The prevailing understanding on the issues under scrutiny suggests that a marginal
increase of 1 percent in indirect taxation would provide a corresponding rise of 0.49 percent in
per capita gross domestic product, under the assumption that all other variables remain
constant. The data related to indirect taxes demonstrates statistical significance, as evidenced
by the t-statistic (3.90) and probability statistic (0.00). Similar to the impact of direct taxes, a

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1 percent increase in direct taxation would lead to a proportional 0.22 percent increase in per
capita GDP domestic product, on the assumption that all other variables remain constant. The
statistical significance of the data related to direct taxes is substantiated by the t-statistic value
of 3.89 and the probability statistic value of 0.00. The average value of the dependent variable,
also known as the constant, is -1.09 when all other dependent variables are held constant.

The aforementioned statistics suggest that indirect taxes has a greater impact on per
capita gross domestic product in Pakistan's economic growth over a long period of time
compared to direct taxation. The research undertaken by Aamir et al. (2011) examines the
long-term consequences of taxation.

Table 5
OLS Result where Dependent Variable is PC-GDP
Variables Coefficients Standard Error t - statistics Probability Value
Constant -1.09614 1.094975 -1.001063 0.3245
L 0.172405 0.453569 0.380108 0.7065
K 0.121942 0.104495 1.166965 0.2521
IDT 0.497754 0.127553 3.902325 0.0005
DT 0.22566 0.057971 3.892628 0.0005
R-squared 0.997301 Durbon Watson Statistic 0.530265
Adjusted R-square 0.996953
F-statistic 2864.030 Probability (F-statistic) 0.00000
Source: Self Estimation

4.4. Error Correction Mechanism (ECM)

The subsequent phase involves the development of the Error Correction Model, which
occurs subsequent to the computation of the long-term relationship between the variables. An
error correction model is constructed in order to examine the presence of a short-run
relationship between the variables. The error term in the aforementioned table 4.3 exhibits
stationarity at the level, hence enabling the functioning of error correction devices. The Error
Correction Mechanism (ECM) estimate for Model-I's per capita GDP from 1979 to 2021 is as
follows:

𝛥𝐿𝑛𝑃𝐶𝐺𝐷𝑃 = 1.87 – 0.76𝛥𝐿𝑛 (𝐿) + 0.13𝛥𝐿𝑛 (𝑘) + 0.04𝛥𝐿𝑛 (𝐼𝐷𝑇) – 0.03𝛥𝐿𝑛 (𝐷𝑇) – 0.02𝐸𝑟𝑟𝑜𝑟 𝑡𝑒𝑟𝑚

The results of the Error Correction Model, as shown in Table 5, suggest that there is no
significant short-term relationship between the variables, as the error term is minimal.
Although direct and indirect taxation are statistically insignificant, they remain the primary
concerns. The significance of capital is paramount, while the labour variable holds less
importance. The findings of this study indicate that a significant and enduring association exists
alone between labour, direct taxes, and indirect taxes. Given that the coefficient of error has a
negative value, it may be inferred that the process of disequilibrium will gradually be rectified
over the course of each year, with a rate of adjustment amounting to 2%.

Table 6
Detailed Result of Error Correction Model for GDP
Variables Coefficients Standard Error t - statistics Probability Value
Constant 1.872743 0.648554 2.887566 0.0073
L -0.767496 0.268531 -2.858134 0.0078
K 0.137705 0.061258 2.247954 0.0324
IDT 0.043656 0.074967 0.582339 0.5648
E1(-1) -0.031032 0.0345 -0.899476 0.3758
DT -0.20369 0.107668 -1.891822 0.0685
R-squared 0.298982 Durbon Watson Statistic 1.958477
Adjusted R-square 0.178117 Probability (F-statistic) 0.055315

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Source: Self Estimation

4.5. Diagnostic Test for Model – Ii

Model – II is CPI, where the impact of direct and indirect taxation on Pakistan's
consumer price index is empirically analyzed using a regression model with the ordinary least
square (OLS) method.

𝐶𝑃𝐼𝑡 = 𝛽𝑜 + 𝛽1𝐷𝐼𝑇 + 𝛽2𝐼𝐷𝑇 + µ𝑡

Various diagnostic tests are applied on the data set: Stationarity, Normality test, Serial
Correlation test, Cointegration test and Multicollinearity test.

4.6. Stationarity Test

In numerous cases, it is seen that a substantial fraction of time series data displays
non-stationarity, either at the original level or following the application of first differencing. The
presence of non-stationarity can result in the production of ratios, statistics, and outcomes that
lack significant interpretation and have the potential to be misleading. The Augmented Dickey-
Fuller (ADF) test is utilized to evaluate the stationarity of data and determine the stationarity
of variables. The results displayed in Table 6 demonstrate that the Augmented Dickey-Fuller
(ADF) statistics surpass the critical values at the significance levels of 1%, 5%, and 10%. This
implies that the variables being examined are non-stationary at a specific level and do not
demonstrate stationarity even after undergoing initial differencing. Therefore, it is essential to
utilize a logarithmic transformation in the study. The variables are subjected to logarithmic
transformation, after which the ADF test is re-executed. The findings indicate that the series
has stability when considering the initial difference, implying that the variables possess an
integration order of one, commonly referred to as I(1). The results are displayed in Table 7.
The model that has undergone transformation is referred to as "Model I."

𝐿𝑛𝐶𝑃𝐼𝑡 = 𝛽𝑜 + 𝛽1𝐿𝑛 (𝐷𝐼𝑇) + 𝛽2𝐿𝑛 (𝐼𝐷𝑇) + µ𝑡

Table 7
ADF Statistic before Transformation (At Level)
Name of Variables ADF Statistics Critical Values
at 1% at 5% at 10%
Consumer Price Index (CPI) 0.39 -3.63 -2.95 -2.61
Indirect Tax (IDT) -0.36 -3.63 -2.94 -2.61
Direct Tax (DT) -0.76 -3.63 -2.94 -2.61
Source: Self Estimation

Table 8
ADF Statistic after log Transformation (at First Differenced)
Name of Variables ADF Statistics Critical Values
at 1% at 5% at 10%
Consumer Price Index (CPI) -2.94 -3.63 -2.95 -2.61
Indirect Tax (IDT) -6.66 -3.63 -2.95 -2.61
Direct Tax (DT) -4.15 -3.63 -2.95 -2.61
Source: Self Estimation

4.7. Cointegration Test

The application of a cointegration test is utilised to determine the presence of a long-

term link among the variables of order 1 of the consumer price index, indirect taxes, and direct
taxation subsequent to their integration. In a manner consistent with the prior approach, the

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Ordinary Least Squares (OLS) model is employed to conduct a test and produce the residuals.
The residuals derived from the model are preserved as the error term, which is next submitted
to the Augmented Dickey Fuller (ADF) test in order to ascertain its stationarity. The findings
reported in Table 8 demonstrate that the error term for model-II displays stationarity at the
level, implying that the residuals are integrated of order zero, commonly referred to as
I(0).The second model also demonstrates the presence of long-term associations between the
Consumer Price Index (CPI) and both direct and indirect taxation. In order to provide a long-
term interpretation, the ordinary least squares (OLS) estimate technique is employed on the
given equation.

Table 9
ADF Statistic for Residual
C ADF Statistics Critical Values
at 1% at 5% at 10%
Residual -2.37 -2.63 -1.95 -1.61

The ordinary least squares (OLS) technique was applied to the log-transformed model.
The detailed information results are presented in Table 9. The findings indicate that the
Adjusted R-square value is 0.995, suggesting that approximately 99.5% of the variation in the
consumer price index (CPI) can be attributed to direct and indirect taxation, while holding all
other variables constant. The probability value of the F-statistic (0.000) indicates that the
model is highly satisfied. The equation computed using the Ordinary Least Squares (OLS)
method is as follows:

𝐿𝑛𝐶𝑃𝐼𝑡 = −2.69 + 0.26𝐿𝑛 (𝐷𝑇) + 0.33𝐿𝑛 (𝐼𝐷𝑇)

The coefficients of the equation indicate that both direct and indirect taxation contribute
to the escalation of inflation, but with varying degrees of influence. The proportion of indirect
taxation in the overall contribution to the Consumer Price Index (CPI) exceeds that of direct
taxation. On average, a 1 percent rise in direct taxation will result in a 0.26 percent increase in
the Consumer Price Index (CPI), assuming that all other variables remain same. A 1 percent
rise in indirect taxation is expected to result in an average 0.33 percent raise in the Consumer
Price Index (CPI), assuming all other variables remain constant. The t-statistics and probability
values associated with these variables demonstrate that the findings are statistically
significant. The average value of the Consumer Price Index (CPI) is -2.69, under the
assumption that all the independent variables remain constant.

Table 10
OLS Result where Dependent Variable is CPI
Variables Coefficients Standard Error t - statistics Probability Value
Constant -2.695499 0.246953 -10.91503 0.0000
IDT 0.332839 0.059571 5.587277 0.0000
DT 0.266378 0.043766 6.086476 0.0000
R-squared 0.996217 Durbon Watson Statistic 0.574762
Adjusted R-square 0.995987
F-statistic 4344.601 Probability (F-statistic) 0.00000
Source: Self Estimation

4.8. Error Correction Mechanism (ECM)

Model II demonstrates that the residuals exhibit stationarity at the level, indicating a
lack of trend or systematic patterns in their behaviour over time. Additionally, the model
provides evidence of a long-run link between the variables under consideration. It is imperative
to assess the presence of a short-run relationship and the significance of the short-run in
respect to the long-run within this model. The Error Correction Model (ECM) has been

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developed. The projected outcome of Error Correction Model (ECM) for Consumer Price Index
(CPI) during the time frame of 1979 to 2021 is as follows:

𝛥𝐿𝑛𝐶𝑃𝐼 = −0.003 + 0.011𝛥𝐿𝑛 (𝐼𝐷𝑇) – 0.005𝛥𝐿𝑛 (𝐷𝑇) – 0.401𝐸𝑟𝑟𝑜𝑟 𝑡𝑒𝑟𝑚

Based on the findings from the ECM model Table results4.10, it can be observed that
the modified R-square value is 0.294, indicating that about 29.4 percent of the average
fluctuation in CPI can be attributed to the influence of indirect and direct taxation, while
keeping all other factors constant. The coefficient of the variable indicates that a 1 percent
increase in indirect taxation is associated with an average increase of 0.41 percent in the
Consumer Price Index (CPI), while holding all other factors constant. Although the direct tax
has a detrimental effect, it is observed that a one percent rise in direct tax leads to an average
decrease of 0.406 percent in the Consumer Price Index (CPI), assuming all other variables
remain same. The impact of both taxes is shown to be statistically insignificant. The presence
of a negative sign in the error term indicates that any long-term disequilibrium will be
corrected at an annual rate of 40%.

Table 11
Detailed Result of Error Correction Model for CPI
Variables Coefficients Standard Error t - statistics Probability Value
Constant 0.003038 0.138282 0.021966 0.9826
IDT 0.011422 0.033159 0.344455 0.7328
DT -0.005367 0.024355 -0.220375 0.8270
E2(-1) -0.401263 0.102515 -3.914199 0.0005
R-squared 0.356468 Durbon Watson Statistic 1.058028
Adjusted R-square 0.294191 Probability (F-statistic) 0.003082
Source: Self Estimation

Global society's main issue is financing government projects and services including
water and energy infrastructure, healthcare, and education. Federal, provincial, and local
governments use tax and non-tax sources to meet their financial obligations. Direct and
indirect taxes are the government's main revenue sources. Revenue shifts, especially taxation-
related ones, affect economies broadly. Pakistani economic policies on budget deficit, foreign
debt management and service, inflation control, and other issues seem ineffective. This
research seeks to determine how much direct taxes drive long-term economic development
and inflation reduction. Indirect taxation may also contribute. This study examines the effects
of direct and indirect taxation on Pakistan's economic growth and their relative importance.
This study investigated the relationship between direct and indirect taxation and inflation using
the consumer price index (CPI).

The time series data utilised in both models encompasses the period from 1979 to 2021
and was sourced from various distinct origins. The primary objective of this study is to
experimentally investigate the impact of taxation on economic growth by employing the Cobb-
Douglas production function (ALK1-). The Augmented Dickey Fuller (ADF) test was employed
to verify the stationarity of the variables. After the identification of non-stationarity in the
variables at both the level and first difference, it was deemed necessary to transform the
variables into logarithmic form. Following the implementation of the modifications, the
Augmented Dickey Fuller (ADF) test was subsequently employed to ascertain the stationarity of
the series. The Ordinary Least Squares (OLS) method was employed to evaluate the magnitude
of the impact due to the fact that the series had achieved stability and all variables exhibited
integration of order one, denoted as I(1), indicating the presence of cointegration. The
examination of the relationships between variables in both the long-run and short-run is
conducted through the utilisation of the Engel-Granger cointegration test and the Error
Correction Mechanism (ECM). The normal distribution can be visually represented through the
use of a histogram, as well as statistically assessed using the Jarque Bera test. The presence of
a fixed error term at the zero level, denoted as I (0), signifies a stable and enduring
relationship over an extended period of time. The observed long-term association suggests that

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indirect taxes exert a more significant impact on promoting economic growth than to direct
taxes. According to projections, a 1% increase in indirect taxation is anticipated to provide a
corresponding 0.49% increase in gross domestic product (GDP).

Various studies show that direct taxing increases GDP by 0.22 percent for every 1
percent increase. A 1% labor force increase boosts GDP by 0.17 percent. Gross fixed capital
creation indicates capital accumulation, with a 1% increase in capital resulting in a 0.12% GDP
gain from GDP calculation. The Error Correction Mechanism (ECM) study shows that the error
term coefficient is statistically negligible at -0.2036. This implies a short-term link between the
variables and a 20% annual correction towards equilibrium.

The second goal of this study is to examine how taxes affect CPI inflation using similar
methodologies. This context uses a basic regression model. The Augmented Dickey-Fuller
(ADF) test shows non-stationarity at the initial level and after the first difference. Logarithmic
transformations are needed to reformulate the data. The model assumes a long-run
relationship and stationarity after initial differencing, I(1). Analysis used Engel Granger
cointegration test and Error Correction Mechanism. The steady error term at the level, its co-
integration at I(0), indicating a long-term relationship in this model. Both indirect and direct
taxes have substantial effects. Conversely, a 1% increase in indirect or direct taxation would
raise inflation by 0.33 or 0.26 percentage points. Error Correction Model (ECM) results are
marginal in this case. Direct taxes hurt inflation. The area also has short-run dynamics. The
coefficient of the error term for this site is -0.4012, indicating that disequilibrium is corrected
at 40% annually.

The study's findings suggest that there is a relationship between taxation, both direct
and indirect, and long-term economic growth. Notably, indirect taxes appear to generate
greater income and contribute more significantly to growth compared to direct taxes. In
contrast, both indirect and direct taxes play a role in contributing to the overall increase in
inflation. In contrast to indirect taxes, direct taxes have a significantly lesser impact on the
escalation of inflation. The disparity in long-term economic growth is rectified at an annual rate
of 20.36 percent, whilst inflation is adjusted at a rate of 40.12 percent per annum.

5. Conclusion and Recommendations

The economic policies in Pakistan are significantly shaped by the political dimension of
the country's economy, since they are heavily impacted by the preferences of the ruling
administration. Over a span of 32 years, Pakistan experienced governance under both military
and democratic structures. This structure poses challenges for governments in properly
implementing economic policy. Pakistan's economy encounters a significant disparity in its
budget on an annual basis. The primary factors contributing to this deficit are extensive
government expenditure and inadequate tax collection methods. The increasing reliance on
foreign loans, heightened debt payment obligations, and a sustained stagnation of the tax to
GDP ratio at a range of 8% to 10% are notable trends. In addition to these aforementioned
indicators, inflation is a persistent phenomenon inside our economy, consistently surpassing
the rate of economic growth. Approximately 65% of our budget is allocated towards
government expenditures, defence, and debt servicing. A significant portion, specifically 60%,
of our Gross Domestic Product (GDP) is not encompassed within the tax base. It is imperative
for policymakers to prioritise long-term planning.

The collection of indirect taxes is necessary to mitigate wealth inequality and foster
sustained economic expansion. The findings of this study additionally corroborated the notion
that indirect taxes yield greater advantages for sustained economic growth and make a more
substantial contribution. Furthermore, it is imperative to undertake measures aimed at
mitigating instances of tax evasion, tax fraud, and tax avoidance. The recommended approach

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 Nasir Munir, Malik Saqib Ali, Azra Nasir

is to expand the tax base rather than resorting to increasing the tax rate. Both individuals who
earn a fixed salary and those engaged in business activities should choose the appropriate tax
mix policy. The engagement of tax administration and chief officers serves the objective of
facilitating tax deduction at source, hence contributing to the augmentation of direct tax
revenue. Indirect taxes play a more significant role in the exacerbation of inflationary
pressures compared to direct taxes. Therefore, the elimination of indirect taxes would be
implemented with the aim of fostering sustained and stable economic growth in the long run.
The mitigation of inflation can be achieved through the implementation of tax policy measures,
such as the regulation and control of taxes, the transition from indirect taxation to direct
taxation, or the use of optimal tax strategies. The management of inflation necessitates the
implementation of monetary policy and taxation measures.

Authors’ Contribution
Nasir Munir: Given the idea of the study and complete the introduction and methodology
section.
Malik Saqib Ali: Retrieved the data set, conducted data analysis, and write the draft.
Azra Nasir: Revise, and approved the final version

Conflict of Interests/Disclosures
The authors declared no potential conflict of interest w.r.t the research, authorship and/or
publication of this article.

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