Detrminants of tax revenue mobilisation in Lesotho

Abstract

The study investigates the determinants of tax revenue mobilization in Lesotho. The tax revenue is disaggregated into valued added tax (VAT) and income profits and capital gain (IPCG) taxes. The study's objective is to examine the determinants of total tax revenue, VAT and IPCG taxes. Another aim is to investigate the effects of the Lesotho Revenue Authority (LRA) on these tax revenue categories. The empirical results are estimated using the autoregressive distributed lag (ARDL) estimation technique using the data for the period 1982 to 2017. The results show that the establishment of the Lesotho Revenue Authority has a significant positive effect on tax revenue and its categories, that the total tax is positively affected by per capita GDP, agricultural and services sectors, and remittance inflows. In contrast, official development assistance (ODA) negatively determines tax revenue. When analyzing the determinants of direct taxes represented by IPCG taxes, it is found that only per capita GDP has a positive effect in the long run. Remittances and ODA have a negative long-run effect. In the short run, LRA and GDP per capita have a significant positive effect on IPCG tax revenue. The VAT model findings show that services hinder the VAT revenue while agriculture and ODA boost it in the long run. The short-run dynamics reveal that VAT revenue is affected positively by the share of agricultural value-added and negatively affected by the share of services value-added and remittances. Policies improving agricultural sector and enhancing economic growth are recommended because these variables have the potential to broaden the tax base in Lesotho.