ECONOMETRIC ANALYSIS OF VALUE ADDED TAX WITH COLOMBO CONSUMER PRICE INDEX IN SRI LANKA

Abstract

Value added Tax (VAT) is one of the major types of current tax practices in Sri Lanka. This study focuses on the determinants of the value added tax and Colombo Consumer Price Index (CCPI) and its future forecasts, which could be used as a guidance of monetary policy decisions. The data used for the study are the VAT data and CCPI data were obtained from Department of Inland Revenue and Colombo Consumer Price Index data were obtained from Central Bank of Sri Lanka for the period of January 2004 to December 2010 which accommodate to 84 month data point in each index. This study is significant, because there is no previous analysis about VAT with CCPI which in Sri Lanka. VAT is a general consumption tax assessed on the value added to goods and services. Therefore, it is very important to study about effect of goods and services prices to VAT revenue.Inflation is simply the percentage change of CCPI which is the official price index in the country. Time series analysis was used to analysis the VAT data CCPI data and econometrics modeling approach considers the impact of CCPI factor in forecasting VAT for the future. Then Ganger Causality test was applied to find the direction of causality between VAT and CCPI. Causality between VAT to CCPI. Further co-integration test was used to identify linear combination of the integrated series for which is the best define for long run equilibrium relationships between the variables. Since both VAT and CCPI series are non stationary order one, Therefore,Vector Error Correction (VEC) Model was formulated and if concluded that the changes of price level of CCPI were strongly affected by the VAT.

Key Words: CCPI, VEC, VAT, VAR

For full paper: fmscresearch@sjp.ac.lk