Validity of the Value Added Tax in the SAARC Region

Value added tax (VAT) is considered as the reform tax system of the 21st century, which has been implemented popularly in more than 135 countries in the world. In SAARC region, Pakistan was the first adaptor of VAT. It implemented VAT in 1990. The basic objective of the study is to quantify the revenue effect of the value added tax (VAT), in the SAARC region and to check in particular, whether it has proved an effective form of taxation in those countries. It is first shown that a tax innovation, such as the introduction of a VAT boost the revenue ratio of SAARC countries which have adopted VAT and optimizing government to increase the tax ratio. Panel data of SAARC countries from 1995 to 2010 on various macroeconomic factors are obtained to determine the effect of VAT on revenue ratio. The results indicate prosperous set of determinants of VAT adoption as it proves to be a vital instrument to collect tax and enhance revenue ratio. Estimates shows that most of the SARRC countries have adopted value added tax have gained a more effective tax instrument to upgrade their GDP to revenue ratio.