The Impact of Tax Collection and Domestic Entrepreneurial Business Ventures on Services Sector in Pakistan: An ARDL Bound Test Approach

Abstract

The services sector is the leading sector of Pakistan’s economy. It creates employment, foreign exchange earnings, research, and innovation, and significantly contributes to Pakistan’s economy. A significant amount of tax revenue is collected from the services sector. Therefore, it is imperative to analyze how taxation influences the services sector in Pakistan. The objective of the present study is to analyze the impact of tax revenue, entrepreneurial ventures, trade openness, inflation, and GDP per capita on the service sector of Pakistan. For this, data from 1980 to 2020 is used. The long-run ARDL estimates show that taxation adversely impacts Pakistan’s services sector. The results show that the variables domestic entrepreneur venture, gross national expenditures, and trade openness were significant and positively related to the service sector growth of Pakistan, while the variables tax revenue, poverty, and inflation rate were negatively related to Pakistan’s service sector growth rate. By considering the study results, it is concluded that the tax system significantly impacts Pakistan’s services sector. Due to high taxes, businesses in the services industry find it challenging to expand and compete. The policy recommendations are that the government must balance raising tax income with promoting the expansion of the services sector. Further, the government should endeavor to streamline the tax system so that companies can easily comprehend and adhere to the law. However, future research can be used the panel data form for developing countries. Further, the impact of taxation on other segments of the economy, such as agriculture and large-scale manufacturing, can be analyzed.