DYNAMIC RESEARCH JOURNALS (DRJs)

Journal of Economics and Finance (DRJ-JEF)

Volume 2 ~ Issue 8 (August, 2017) pp: 05-14
ISSN (Online): 2520-7490
www.dynamicresearchjournals.org

Empirical Examination of the Link between Value Added Tax and

Total Tax Revenues in Zimbabwe
Wellington Garikai Bonga
Cell: +263775057475; Email: sirwellas@gmail.com

Abstract: Governments in most developing nations heavily rely on tax revenue to sponsor government expenditure,
and Zimbabwe is not an exception. Tax revenue is supposed to be used to grow or develop an economy. This study
seeks to analyse the relationship between value-added tax (VAT) and total tax revenues for the Zimbabwean nation.
The study uses a time series analysis for period 2011-2017, regressing total tax revenues against various tax heads.
Appropriate data tests have been made, rejecting the use of the error correction model, and the study results drawn
on an OLS regression model using STATA 11.1 statistical software. The study results indicate that both VAT on
local sales and VAT on imports have a significant impact on total revenue. VAT on imports however, have a
negative impact while that on local sales has a positive impact. The study recommended that efforts to improve tax
compliance should be made to local firms so that more VAT could be collected. The study acknowledged the recent
introduction of Automated Teller Machines by the revenue authority. Individual taxes and carbon tax have a positive
impact to tax revenue, while company tax was marginally insignificant calling for increased measures to be
exercised, and customs duty, mining royalties and excise tax were insignificant to explain total revenue.
Key words: Tax Revenue, VAT, Error Correction Model, Registered operator, Tax Compliance, Time Series,
Zimbabwe
JEL Codes: C01, C13, C22, E61, E62, E64, F43, H24, H25, H50, H61, H71, H72.

I. Introduction
The capacity of the government to finance its expenditure depends on the ability of the tax system to generate
adequate revenue. Tax administration competency and efficiency contribute to determine the capacity of a country
to generate adequate revenue from taxation (Bird, 2015). As supported by Maiga (2015), tax revenue is used to
finance government expenditure on a range of projects as well as paying for transfer payments, such as benefits to
specified low-income households. In any country, developed or less developed, mobilization of resources constitutes
a paramount aspect of achieving a higher level of economic growth (Dzingirai and Tambudzai, 2014). Government
needs money to be able to execute its social obligations to the public and these social obligations include but not
limited to the provision of infrastructure and social services. Merima et al. (2013) has also indicated that mobilizing
revenue is a way for government to create fiscal space, provide essential public services, and reduce foreign aid and
single resource dependence. Okoli (2015) emphasized a continuous review of Value Added Tax (VAT) driven by
the need to support the existence of the government.
Raising more domestic revenue is a priority for most SubSaharan African countries (Drummond et al. 2012).
Developing countries used to rely heavily on trade taxes, seigniorage and financial repression as the main sources of
fiscal revenue (Aizenman and Jinjarak, 2005). Greater trade integration has implied a drastic cut in tariffs, reducing
thereby the revenue of trade taxes. Most countries dealt with the new challenges by adopting new taxes, including
the VAT. However, worth to note is that the concept of value-added taxation is not new; it was first advanced for
use in the United States in 1921 by T.S Adams (Oakland, 1967).
VAT is an indirect tax on consumption, charged on the supply of taxable goods and services (ZIMRA Website).
VAT is levied on transactions rather than directly on income or profit, and is also levied on the importation of goods
and services. Theory and practice indicate that to be efficient, the VAT must be consumption-typed, broad-based,
and applied through to the retail stage (Le, 2003). For the Zimbabwean nation, VAT was introduced in 2004 to
replace the former sales tax regime. This was a tax reform aimed at increasing government revenue, and this move
was done by many African countries with the support of IMF and World Bank. As supported by Mwakalobo (2015),
the primary motivation of the economic reforms was meant to promote rapid economic growth, achieve
macroeconomic stability, reduce fiscal vulnerability and alleviate poverty. The standard VAT rate adopted in
Zimbabwe is 15%, 0% for zero-rated goods, and no VAT for exempt supplies, and this differs with other nations.

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 Empirical Examination of the Link between Value Added Tax and Total Tax Revenues in Zimbabwe

Research Problem
The performance of VAT as a source of revenue in Zimbabwe is very encouraging, however it remains
difficult to find ways to systematically assess and ascertain the true impact of VAT on the economy. Various and
previous evaluations have failed to separate the impact of VAT, rather they bunched many tax heads in their
analysis, leaving a lot to be evaluated on VAT alone.
There exists a poor relationship between tax payers and tax authorities. Failure to remit VAT is a source of
serious concern in Zimbabwe.
There is growing donor fatigue and dwindling domestic revenue reserves in most developing countries
(with Zimbabwe included), and the need to strengthen national revenue collection systems has become particularly
imperative (Zhou and Madhikeni, 2013). However, devising efficient means of collecting tax revenue remains a
daunting challenge.

Research Objectives
The main objective of the study is to determine the extent to which VAT contributes to total tax revenue in
Zimbabwe. The other sub-objective is to determine the position of VAT among other vibrant tax heads.

Research Questions
What is the relationship between VAT and total tax revenue?
How do VAT rank among other tax heads contributing to total tax revenue?
What is the speed of adjustment for convergence to take place from a short run disequilibrium?

Significance of the study

Many previous studies that have examined the impact of taxation on national income, have been combining all
tax heads and very few studies have isolated the impact of each tax head. This study adds to literature, by isolating
and examining VAT and ranking it among other tax heads.

II. BACKGROUND OF THE STUDY

Value Added Tax (VAT) is a consumption tax charged by the registered operators on their costs plus mark ups.
Many developing countries adopted the value added Tax system because of the perceived advantage inherent in the
collection process (Ofishe, 2015). A frequently cited advantage of the VAT is that this tax is collected throughout
the production chain, giving it a practical advantage (Aizenman and Jinjarak, 2005). VAT is paid by the final
consumer and the registered operators are only agents. Registered operators are only required to charge and collect
the tax, maintain the necessary records, furnish tax returns and remit the taxes paid by consumers within the set time
frames. The VAT due after adjustments for output and input tax therefore, does not belong to the operators and must
be accounted for promptly. The fact has been supported by Sivasakkaravarthi and Ganesan (2011), when they
indicated that the manufacturer (registered operator) remits to the government the difference between these two
amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs. Therefore,
VAT is an indirect tax system designed in the form of a final tax liability on the final consumer of goods and
services (Ofishe, 2015).
For the Zimbabwean economy, important VAT remission dates are very crucial for registered operators. Every
business is classified and falls into either group A, B, C or D depending on the level of operations. Table below
present the important dates for VAT payments;

Category A Due Dates Category B Due Dates

Tax Period On or before Tax Period On or before
December/January 25th February November/December 25th January
February/ March 25th April January/February 25th March
April/ May 25th June March/ April 25th May
June/ July 25th August May/June 25th July
August/ September 25th October July/ August 25th September
October/November 25th December September/ October 25th November
Category C Due Date Category D Due Date
By the 25th of the following month after the end of the By the 25th of the following month after the end of the
month during which the VAT was collected. approved tax period.
Source: ZIMRA website.

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 Empirical Examination of the Link between Value Added Tax and Total Tax Revenues in Zimbabwe

Registered operators are expected to observe the dates, or they risk to pay penalties for late payments.

III. Literature Review

The study will review theories and empirical literature related to Value Added Tax and national income. Very
little literature exists on the subject of VAT in less developed countries, extensive studies have nevertheless been
done on the alternation prominence of Indirect Tax in developing countries in general.

3.1 Theoretical Literature Review

VAT is a subset of the tax system, and hence various basic theories do also apply to its formulation. Compared
with alternatives in indirect taxation, the VAT has more revenue potential: it is generally more broad-based and
entails a trail of invoices that helps improve tax compliance and enforcement (Le, 2003). As supported by Chigbu
and Ali (2014), Value Added Tax (VAT) is now the most common form of consumption tax system used around the
world. The economists (and various researchers) have put forward many theories of taxation at different times to
guide the state as to how justice or equity in taxation can be achieved (Njogu, 2015). The basic theories are
presented in the table below;
Theory Postulations & Discussions
Socio-political Theory The theory states that social and political objectives should be the major factors in
selecting taxes. A tax system should not be designed to serve individuals but the society
as a whole. Each economic problem should be looked at in its social-political context and
an appropriate solution found accordingly.
Cost of Service Theory The theory lays emphasis on semi-commercial relationship between the state and the
citizens. The theory emphasizes that the state should give up basic amenities and welfare
functions. This means that the citizens are not entitled to any benefits; if they however
receive any benefits, then they must pay the cost of service.
Expediency Theory The theory indicates that every tax proposal must pass the test of practicability. It must
be the sole consideration weighing the authorities in choosing a tax proposal.
Accordingly, economic and social objectives of the state as effects of a tax system should
be treated as irrelevant.
Benefit Received The theory is based on the assumption that there is basically an exchange
Theory relationship between tax-payers and the state. The state provides certain goods and
services to the members of the society and they contribute to the cost of these supplies in
proportion to the benefits received (Bhartia, 2009).
Laffer Curve This is a tax rate optimisation theory. Laffer (2004), postulated this theory to explain the
theoretical representation of the relationship between government revenue raised by
taxation and all possible rates of taxation. Increasing tax rate beyond a certain point will
become counter-productive for raising further tax revenue because of diminishing
returns.
Faculty Theories The theory states that one should be taxed according to the ability to pay. A citizen is to
pay taxes just because he can, and his relative share in the total tax burden is to be
determined by his relative paying capacity. The bottom line of this theory is to maximize
the distributive effects of taxes within the country.
Ibu Khalduns Theory The theory is explained from two-folds; the arithmetic and economic effects. The
arithmetic effects states that if VAT rates are lowered the VAT revenue will be lowered
by the amount of the decrease in the rate; and the reverse is the case for an increase in
VAT rates. The economic effect recognized the positive impact that lower VAT rate have
on work, output and employment and thereby providing incentives to increase these
activities whereas raising VAT rate has the opposite economic effect by penalizing
participation in the taxed activities.
The Standard Theory of The theory posits that a tax system should be chosen to maximize a social welfare
Optimal Taxation function subject to a set of constraints. The literature on optimal taxation typically treats
the social planner as a utilitarian: that is, the social welfare function is based on the
utilities of individuals in the society. In its most general analyses, this literature uses a
social welfare function that is a nonlinear function of individual utilities. Nonlinearity
allows for a social planner who prefers, for example, more equal distributions of utility.
However, some studies in this literature assume that the social planner cares solely about

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 Empirical Examination of the Link between Value Added Tax and Total Tax Revenues in Zimbabwe

average utility, implying a social welfare function that is linear in individual utilities
Modern Optimal A primary focus of modern optimal tax research has been the schedule of marginal tax
Taxation rates on labour income. This was the heart of Mirrlees' (1971) contribution, and it
remained a high-profile topic of researchat least until recent work in dynamic models.
In the Mirrlees model, the schedule of marginal tax rates is the main battleground in the
trade-off between equality and efficiency. A cost-benefit analysis that applies to any
proposal to alter the schedule of marginal tax rates is of concern. Other things equal, an
increase in a marginal tax rate is more attractive when few individuals would be affected
at the margin and many would be affected inframarginally. Therefore, to strike the right
balance between efficiency and equality, the marginal tax rate schedule must be tailored
to the shape of the ability distribution.
Equal Sacrifice Theory The Equal-distribution/Equal sacrifice/Proportionate theory holds that income, wealth,
and transaction should be taxed at a fixed percentage; that is, people who earn more
should pay more taxes, but will not pay a higher rate of taxes. The profounder of the
theory were of the opinion that if taxes are levied in proportion to the incomes of the
individuals, it will extract equal sacrifice.

3.2 Empirical Literature Review

There exist previous studies examining either the relationship or impact of VAT on revenue generation as well
as on economic growth. These studies will aid the current study in answering the research questions raised.
Okoli (2016) examined the correlation between VAT and national income for the Nigerian economy. The study
employed the time series approach for a period 1994 to 2012.The study indicated that Nigeria has VAT, Company
Income Tax, Personal Income Tax and Petroleum Profit Tax as the tax heads under investigation. The study results
revealed that VAT is the second long-term source of the total federally collected revenue. The study recommends
that all identified loopholes should be plugged for VAT revenue to contribute more to total Federally collected
revenue.
Ofishe (2015), for the Nigerian economy empirically analysed the impact of VAT on economic growth using
1994 2012 data, collected from Central Bank of Nigeria statistical bulletin and Federal Inland Revenue Service
(FIRS) reports. The study employed the OLS techniques to estimate three models in line with the formulated
hypotheses, and the models revealed a strong positive significant impact of VAT on economic growth. The results
also revealed that there is positive relationship or impact of VAT on total tax revenue over the period studied. The
study recommended among other things that government should put in place measures to effectively utilize
generated VAT revenue for infrastructural and economic development.
Erero (2015) analysed the effects of increases in value added tax (VAT) through a dynamic computable general
equilibrium model. The database of the model encompasses a social accounting matrix (SAM) for the year 2010.
The study included all the important South African taxes in the SAM and the household sectors were disaggregated
according to income deciles, with the top decile being further split into five groups. Five different simulations were
performed, ranging from 1% increase in the VAT to 5% over the period 2012 to 2018. Study findings show that the
percentage increase in VAT would not affect lower income households negatively if the higher government revenue
flowed to the lower income households.
Sufaj (2015), for Albania analysed an econometric model, which consists of the total revenue component
explained by capital expenditure, current expenditure and VAT, using a time series econometric method. The main
conclusion from the study was that VAT and Current Expenditure were significant (which also is reinforced by the
economic theory), positively affect the Total Revenue of the government, and furthermore they are significant.
Umeora (2013) investigated the effects of VAT on economic growth and total tax revenue in Nigeria, using
simple linear regression method on 1994-2010, time series data. The results of regression analysis show that VAT
has significant effect on GDP and also on Total Tax Revenue. The findings of the study indicated that the
government is encouraged to sensitize the people to enable it increase the tax rate so as to enlarge its annual revenue
for economic development.
Newhouse and Zakharova (2007) studied the impact of VAT modification in Philippines and evaluated the
various methods that were adopted to mitigate the expected consequences faced by poor households. Their survey
revealed that as VAT was reformed, real household consumption experienced reduction in both poor and high
income households. Further, they revealed that poor relied more upon unrefined agricultural products for
consumption as they were exempt from VAT. They also found that by lessening measures aimed at social
protection, hostile effect of VAT reform could be reduced.

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 Empirical Examination of the Link between Value Added Tax and Total Tax Revenues in Zimbabwe

Ajakaiye (2000) worked on the impact of VAT on key sectoral and macroeconomic aggregates, using a
Computable General Equilibrium (CGE) model considered suitable for Nigeria.
This paper describes the Graetz proposal in detail and analyses its effects on federal revenues, spending and the
deficit, the distribution of the tax burden, marginal tax rates and other incentives, and the tax systems administrative
and compliance costs. The proposal is analysed relative to the Tax Policy Center (TPC) Current Policy Baseline,
which assumes permanent extension of the 2001, 2003, and 2010 tax cuts (except for the one-year payroll tax
reduction), continuation of the 2011 AMT exemption amounts (indexed for inflation) and extension of the2011
estate tax exemption of $5 million (indexed for inflation) and top rate of 35 percent.
Sekwati and Malema (2011) in their study examined the potential impact of the increase in VAT on household
consumption in Botswana. Their study derived motivation from the increase in VAT from 10% to 12%necessitated
by among others the need to find alternative ways of financing the 2010/11 budget deficit in light of the difficult
revenue situation faced by Botswana following the global economic meltdown, with real GDP declining by 4.6% in
2009. The study concluded that low income groups have a higher marginal propensity to consume, and it is highly
likely that poor households will be more affected than other sections of the population, and for middle to upper
income classes, the effect may be negligible given that they have degrees of freedom to adjust their consumption
patterns in response to the increase in VAT.

IV. METHODOLOGY
The study will employ a Time Series Analysis to the data collected. Data will be collected from the official
revenue collector, Zimbabwe Revenue Authority (ZIMRA) database, and will be the most reliable data. An OLS
regression model will be run using the STATA Statistical Software (a command prompt software). Appropriate data
tests will be done, which include unit root tests, and multicollinearity to avoid spurious regressions.

4.1 CONCEPTUAL FRAMEWORK

The study will be using the conceptual framework shown below;

The diagram above shows the conceptual framework for the study. Total income is determined by various
tax heads shown in the diagram. The study will determine the strength of effect of each explaining variable on the
dependant variable.

4.2 ECONOMIC MODEL

The economic model used by the study indicate that total income is a function of various tax heads and
other non-tax income. This is algebraically shown by the function below:

TR = f ( LVAT , MVAT , IND, COMP, CDUTY , EXCISE, CARBON , MINROY , OTHER, NTR) Eqn.1

From the above function and also considering data availability for the period under study; the study derives
a specific model shown below;

TRt = 0 + 1 LVATt + 2 MVATt + 3 INDt + 4 COMPt + 5 CDUTYt + 6 EXCISEt + 7 CARBONt + 8 MINROYt + t Eqn.2

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 Empirical Examination of the Link between Value Added Tax and Total Tax Revenues in Zimbabwe

Where; TR -national revenue, LVAT - value added tax on local sales, MVAT - VAT on imports,
EXCISE - excise tax, CARBON - carbon tax, MINROY - Mining Royalties, IND - individuals tax, COMP -
Corporate tax, CDUTY - Customs duty, OTHER - other taxes, and these include tobacco levy, capital gains tax,
withholding tax, presumptive tax, remittances, NTR - non tax revenue, 0 8 -are coefficients to be estimated,
-error term and t -denotes time dimension.
Depending on the Johansen Cointegration test, the model may be extended to be an Error-Correction Model
to show the short term dynamics of equilibrium adjustments. An error correction term will be added, and its
magnitude and significant level observed.

V. DATA PRESENTATION AND ANALYSIS

The study obtained the data from ZIMRA website and quarterly, semi-annual and annual publications.
Wherever possible, the author used deductions and additions for the missing data, this applies to fourth quarter data
and second quarter data. Data has been collected for nine variables including the dependent variable total revenue.

5.1 SUMMARY STATISTICS

The summary statistics are presented below;
. s um t r lv at m va t in d co mp cd ut y ex ci se c ar bo n mi nr oy

V ar ia bl e Ob s Me an St d. D ev . Mi n M ax

tr 25 8. 27 e+ 08 1. 16 e+ 08 5 .7 3e +0 8 1. 14 e+ 09
l va t 25 1. 56 e+ 08 7. 36 e+ 07 9 .9 2e +0 7 4. 78 e+ 08
m va t 25 1. 14 e+ 08 2. 36 e+ 07 5 .6 8e +0 7 1. 68 e+ 08
in d 25 1. 84 e+ 08 3. 12 e+ 07 1 .3 4e +0 8 2. 56 e+ 08
c om p 25 9. 48 e+ 07 2. 52 e+ 07 5 .2 6e +0 7 1. 72 e+ 08

cd ut y 25 8. 21 e+ 07 1. 08 e+ 07 6 .4 0e +0 7 1. 08 e+ 08
e xc is e 25 1. 29 e+ 08 3. 62 e+ 07 6 .2 6e +0 7 1. 92 e+ 08
c ar bo n 25 8 40 37 28 1 14 65 74 57 32 00 0 1. 14 e+ 07
m in ro y 25 2. 53 e+ 07 2. 57 e+ 07 -7 .6 5e +0 7 7. 91 e+ 07
The study variables have each 25 observations. The variable mean, standard deviation, minimum and
maximum values are presented. Mining royalties has an outlier value, this when investigated shows a refund done of
US$101.55 million in the fourth quarter of 2015.

5.2 STATIONARITY TEST

Econometric analysis requires working with stationary data. All the variables have been tested for unit
roots using the Augmented Dickey-Fuller test. The results are presented below;
VARIABLE LEVEL ADF STATISTIC CRITICAL VALUES INTERPRETATION
TR -3.820*** Stationary
LVAT -4.820*** @ 1% = -3.750 Stationary
MVAT -4.360*** Stationary
IND -2.816* Stationary
COMP -5.371*** @ 5% = -3.000 Stationary
CDUTY -2.768* Stationary
EXCISE -1.867 Not Stationary
CARBON -3.978*** @ 10% = -2.630 Stationary
MINROY -3.790*** Stationary

EXCISE is the only variable not stationary. The study employed the differencing method to try and remove
the time effects from the variable. Results are presented below;
VARIABLE LEVEL ADF STATISTIC CRITICAL VALUES INTERPRETATION
DEXCISE -5.957*** @ 1% = -3.750 Stationary
@ 5% = -3.000
@ 10% = -2.630

The variable EXCISE has become stationary after its first difference. The study will use the stationary
values of the variable in the analysis (DEXCISE).

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5.3 MULTICOLLINEARITY
To avoid spurious regression, the study checked on the level of collinearity of the explain variables against
the rule of thumb of 0.8. The correlation matrix is shown below;
lv at mv at in d co mp cd ut y ca rb on m in ro y

l va t 1. 00 00
m va t 0. 34 30 1. 00 00
in d 0. 24 74 0. 27 46 1 .0 00 0
c om p 0. 52 17 0. 14 14 0 .2 95 6 1. 00 00
cd ut y 0. 23 58 0. 54 65 0 .1 81 7 0. 21 48 1 .0 00 0
c ar bo n 0. 44 12 0. 36 81 0 .5 77 4 0. 58 80 0 .3 69 0 1. 00 00
m in ro y - 0. 02 37 0. 04 84 0 .0 52 8 - 0. 40 09 0 .0 76 4 - 0. 12 05 1 .0 00 0
de xc is e 0. 18 81 0. 69 84 0 .2 69 2 0. 27 91 0 .4 86 3 0. 34 17 -0 .2 12 7
According to the correlation matrix, all variables can be included in one regression equation, since there is
no serious correlation between the explaining variables. The strongest relationship is between LVAT and DEXCISE
of 0.6984, which is less than 0.8 and hence acceptable.

5.4 OLS REGRESSION MODEL

An OLS regression model has been run using STATA 11.1 software, and the results are presented below;
. r eg re ss t r lv at m va t in d c om p cd ut y ca rb on m in ro y de xc is e

S ou rc e SS df MS N um be r of o bs = 24
F( 8, 1 5) = 1 6. 39
Mo de l 2 .2 92 2e +1 7 8 2. 86 52 e+ 16 P ro b > F = 0. 00 00
R es id ua l 2 .6 22 5e +1 6 15 1. 74 83 e+ 15 R -s qu ar ed = 0. 89 73
A dj R -s qu ar ed = 0. 84 26
To ta l 2 .5 54 4e +1 7 23 1. 11 06 e+ 16 R oo t MS E = 4. 2e +0 7

tr C oe f. St d. E rr . t P> |t | [9 5% C on f. I nt er va l]

l va t .2 95 26 52 .1 50 54 74 1 .9 6 0. 06 9 - .0 25 61 89 .6 16 14 94
m va t - 1. 05 42 62 .5 95 56 96 -1 .7 7 0. 09 7 - 2. 32 36 88 .2 15 16 47
in d 1. 50 80 53 .3 66 22 93 4 .1 2 0. 00 1 .7 27 45 39 2. 28 86 52
c om p .8 24 53 36 .5 45 73 93 1 .5 1 0. 15 2 - .3 38 68 23 1. 98 77 49
cd ut y .3 95 47 44 1. 00 92 14 0 .3 9 0. 70 1 - 1. 75 56 14 2. 54 65 63
c ar bo n 41 .6 47 43 1 3. 11 31 3 .1 8 0. 00 6 13 .6 97 52 69 .5 97 35
m in ro y .4 05 13 17 .3 99 34 41 1 .0 1 0. 32 6 - .4 46 05 01 1. 25 63 14
de xc is e 1 .0 54 28 .8 83 33 16 1 .1 9 0. 25 1 - .8 28 49 67 2. 93 70 57
_c on s 1. 50 e+ 08 1. 06 e+ 08 1 .4 2 0. 17 6 - 7. 50 e+ 07 3. 76 e+ 08

The OLS regression model has an adjusted R-squared of 0.8426, implying that about 85% variation in total
revenue is explained by the included explanatory variables. The model is correctly specified as indicated by the F-
statistic of 16.39 which is significant at 1% level. Four tax heads have been found to significantly explain total
revenue in the Zimbabwean economy, and these are local VAT, VAT on imports, individual taxes (PAYE) and
carbon tax. Company tax is marginally insignificant, while customs duty, mining royalties and excise tax are
insignificant.
To determine the exact impact of VAT on total revenue, the study separated VAT on local sales and VAT
on imports. Both variables have been found to significantly explain total revenue. However, VAT on imports exerts
negative impact on total revenue, while VAT on local sales has a positive contribution which is significant at 1%
level.
Some studies reviewed in the literature review section proposed a positive relationship between VAT and
total revenue, however, the studies used total VAT, and did not bother to further separate the components of VAT,
that is, local sales VAT and import VAT.
The study could not estimate an error correction model since stationarity of variables has been found. No
cointegration tests are necessary in this case. This has been so due to a near stability that has been experienced in
Zimbabwe in the dollarization era.

VI. FINDINGS AND RECOMMENDATIONS

Through the study results, the study has come up with the following recommendations;
1. VAT on local sales has been found to significantly contribute to total revenue. There is greater need, that
policies that enhance collection of VAT from local firms be promoted. The recently launched Automated
Teller machines may be of use to improve compliance and increased revenue collection.
2. VAT on imports though significant, it has a negative effect on total revenue. There is no greater reliability
on imports to increase revenue. Rather imports drain revenue.

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3. Individual taxes significantly contribute to total revenue. Policies that formalises the informal sector are
encouraged, so that more PAYE can be generated.
4. Carbon tax contributes significantly. Policies that enhance further collections are encouraged.
5. Company taxes have been found to be insignificant. This might be caused by the liquidity crisis, which is
causing firms not to operate at full capacity. Many firms are making losses or low profits since
dollarization. There is greater need for government support to help firms boost their operations. This may
be in form of creating a good conducive environment, access to credit lines among others.
6. Mining royalties have been found to be insignificant to explain total revenue. This result is very worrisome,
as Zimbabwe claims to be heavily endowed with minerals. There is greater need to revive the mining
sector, as well as tightening tax controls for the sector.
7. Excise tax have been found to have an insignificant impact to total revenue, yet the tax head appears as one
of the strong heads in presentation in each statistics bulletin. More controls are called for companies
producing excisable goods to avoid any loopholes.
8. Enforcing VAT payments may require requires employing resources for collecting and processing
information, as well as prosecuting and penalising agents found to be underpaying. Economic theories
recommend that the enforceability of taxes is impacted by political economy considerations.
9. As supported by Penduka (2015), there is need to develop systems that are compatible and can be
integrated with the computers in business premises. The government should come up with a more user-
friendly system that is easy to use linked to the internet for faster and easy access by ZIMRA.

VII. CONCLUSION
The study empirically examined the impact of VAT on total revenue for the Zimbabwean economy using time
series data for period 2011 to 2017. The study used quarterly data to obtain degrees of freedom, the data ranges from
first quarter of 2011 to the first quarter of 2017. The components of VAT have been separated to enable more
exploration, that is VAT on local sales and VAT on imports. VAT on local sales proved to positively contribute to
total revenue, while VAT on import have a negative impact.
With the support of Zhou and Madhikeni (2013), the study notes that an efficient national revenue collection
system is the hub of every public administration system and the cornerstone of sound fiscal management. Given that
the domestic tax bases in most African countries are undermined by widespread tax avoidance and evasion (IMF
2011), there is greater need that detection of tax loopholes be made and necessary tasks done as the journey to
efficiency in tax collection and revenue generation.
Development of VAT should be preferred among other taxes, given that the value added tax system is
consumption tax levied on the supply of goods and services which will be difficult to evade both by the rich and the
poor, small or large companies (Ofishe, 2015). VAT proves to be an efficient tool for revenue collection; its
performance, therefore, has direct impact on fiscal mobilization, macroeconomic stability, and development (Le,
2003).
In Zimbabwe there is a pressing need to increase revenue inflows, but revenue collection should not be at the
sacrifice of economic and citizen welfare. For over the past decade tax revenue has remained the major source of
domestic revenue in Zimbabwe (Bonga et. al, 2015). Tax revenue collection should comply with best practices of
equity, ability to pay, economic efficiency, convenience and certainty (Zhou and Madhikeni, 2013). Important to
note is that, the tax system should have best properties; a desirable property of a tax system is that income elasticity
and buoyancy should be equal or greater than unity (Bonga, 2009).
In conclusion, as indicated by Erero (2015), VAT should be associated with uncomplicated enforcement, as it
allows the fiscal authority to compare reported sales of each intermediate product with reported purchases of
producers, using that intermediate product as an input in a vertical production chain.

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 Empirical Examination of the Link between Value Added Tax and Total Tax Revenues in Zimbabwe

APPENDIX A: DATA USED IN THE STUDY

YEAR TIME TR LVAT MVAT IND COMP CDUTY EXCISE CARBON MINROY
2011Q1 1 573200000 135732045.1 106646606.9 134050078.4 60207499.73 78111089.33 62555263.33 5732000 22928000
2011Q2 2 721603970.1 148223143.4 116461041.3 134830722 76409921.98 85031241.26 78719917.47 7216039.701 28864158.8
2011Q3 3 660705642 99202012.3 126257106.6 148625178.1 67856688.58 85208491.66 81141214.54 8574674.4 26428225.68
2011Q4 4 644490388 225900745.9 129180774.9 170479873.1 92101257.91 85981603.09 84173700.37 6444903.88 25779615.52
2012Q1 5 723900000 158096716.4 134674980.6 145527368 75230901.6 88491640.8 88887014.5 7239000 28956000
2012Q2 6 771165236.3 100457954.2 103990869.1 154187784.8 102816460 81836223.64 86551650.36 7711652.363 30846609.45
2012Q3 7 823400000 143408648.9 127685205.3 163032352.6 117212983.2 89478919.88 101822274 8234000 37176532.84
2012Q4 8 1135534764 477610073.4 153691985 223646994.6 147451255.2 94399315.68 116804861.2 11355347.64 45421390.55
2013Q1 9 818600000 145568405.9 124002716.1 172747005 85585692 89458198 118340134 8580493.7 43113916
2013Q2 10 836900000 133718836.8 113908638.7 174532248.3 99515736.9 83215969.6 117199478.7 9019506.3 37994905.09
2013Q3 11 897345307.5 154769430.5 129318123.4 211330253.6 102358448.5 91760416.72 129904846.5 9645156.12 39004999.94
2013Q4 12 877154692.5 123884146.9 130341231.8 181743283.1 113590702.6 90873335.68 144680810.8 9559400.88 13614848.97
2014Q1 13 834600000 103783064 56799411 193265683 104731879 71210091 109758608 8272744.1 79132758
2014Q2 14 888150000 128157136.5 167896284.4 236265109.9 91724707.52 65774273.41 131680102.2 8941451.49 33506690.77
2014Q3 15 884502264.1 123921130.3 126319998.6 226227207.5 92236066.65 88245086.09 122899264.8 8850749.83 33119341.81
2014Q4 16 996940000 153537669.1 129900706 256011499.6 83426246.83 107698749.5 147896225 8920204.58 45907509.42
2015Q1 17 803200000 107820429 105564551 200184529 71596290 78343665 165402945 8437230.2 19653138
2015Q2 18 860235486.6 104944063.9 109680392 179352761.9 95882814.52 82074384.43 180837892 8940280.36 20135748.37
2015Q3 19 878218859 136236297 116016935 195397449 85137269 89319999 176285143 8647946 17273454
2015Q4 20 959332119 198074696.3 109388637.7 202899274.4 172068460.9 87420780.38 191691067.5 9964469.61 -76483993.99
2016Q1 21 724888653.7 131095421.3 83692503.87 167429294.1 52553046.48 67672173.44 160447996.4 8111851.03 13395017.76
2016Q2 22 825343776.1 153628589.3 86320576.4 188344787.5 92321234.18 67742281.26 153269647.1 7838361.7 19607967.39
2016Q3 23 854169170.4 157459995.7 89793922.53 204030886.7 102027436.4 64014237.99 157987593 7993064.63 14791031.86
2016Q4 24 843740000 159036859.3 98444384.34 176725608.3 93816429.03 72956371.3 168592574 8520994.02 15107492.53
2017Q1 25 826630721 185362544.8 85545300.98 165833145.2 92369217.07 66041936.92 150288308 7341675.42 16392354.46
Notes: 1. There was a refund for Mining Royalties of US$101.55 million in the Fourth Quarter of 2015.
2. 2011 & 2012 Data for Carbon Tax & Mining Royalties have been estimated using percentages provided.
3. Q2 and Q4 Data were obtained through calculation using yearly presentations and half yearly presentations.

APPENDIX B: OLS REGRESSION FOR VARIABLES IN LEVELS

. r eg re ss t r lv at m va t in d c om p cd ut y ex ci se c ar bo n mi nr oy

S ou rc e SS df MS N um be r of o bs = 25
F( 8, 1 6) = 3 1. 35
Mo de l 3 .0 29 7e +1 7 8 3. 78 72 e+ 16 P ro b > F = 0. 00 00
R es id ua l 1 .9 33 1e +1 6 16 1. 20 82 e+ 15 R -s qu ar ed = 0. 94 00
A dj R -s qu ar ed = 0. 91 00
To ta l 3 .2 23 1e +1 7 24 1. 34 29 e+ 16 R oo t MS E = 3. 5e +0 7

tr C oe f. St d. E rr . t P> |t | [9 5% C on f. I nt er va l]

l va t .2 70 27 24 .1 21 30 52 2 .2 3 0. 04 1 .0 13 11 69 .5 27 42 79
m va t .1 20 78 62 .4 64 76 54 0 .2 6 0. 79 8 - .8 64 47 23 1. 10 60 45
in d .9 00 95 46 .3 80 12 23 2 .3 7 0. 03 1 .0 95 13 14 1. 70 67 78
c om p 1. 51 58 28 .4 86 62 09 3 .1 2 0. 00 7 .4 84 23 81 2. 54 74 18
cd ut y 1. 00 43 26 .8 34 12 88 1 .2 0 0. 24 6 - .7 63 94 86 2. 77 26
e xc is e 1. 21 00 27 . 41 88 79 2 .8 9 0. 01 1 .3 22 04 33 2. 09 80 11
c ar bo n 2 4. 00 85 1 2. 20 83 1 .9 7 0. 06 7 - 1. 87 19 39 49 .8 88 95
m in ro y 1. 25 77 66 .4 58 12 53 2 .7 5 0. 01 4 . 28 65 84 2. 22 89 48
_c on s - 1. 13 e+ 07 7. 15 e+ 07 -0 .1 6 0. 87 7 - 1. 63 e+ 08 1. 40 e+ 08

APPENDIX C: AUTOCORRELATION TEST

. e st at d wa ts on

D ur bi n- Wa ts on d -s ta ti st ic ( 8, 24 ) = 1. 77 68 5

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