The Influence of Value Added Tax on Private Domestic Investment in Tanzania: Time Series Data (1998–2024)

Abstract

This study analyzes the influence of Tanzania’s Value-Added Tax (VAT) on private domestic investment (PDI) from 1990 to 2024, utilizing the Vector Error Correction Model (VECM) as a data analysis technique to examine the relationships across both the short and long terms. Unit root, multicollinearity, autocorrelation, and stability tests were among the diagnostic procedures that guaranteed the validity and dependability of the model. The Public investment was used as a control variable in this study, which focuses on value-added tax (VAT). The results show a substantial inverse association over the long term between VAT and private domestic investment, indicating that greater tax burdens deter expansion and reinvestment. Although its long-term effect is still positive but statistically negligible, VAT has a short-term positive and statistically significant influence on PDI, suggesting that better VAT administration may encourage investment by raising government revenue and investor confidence. The strong positive correlation between public investment and PDI highlights the complementary role that both play in promoting the growth of the private sector. The study concludes that excessive Value Added Tax can impede private domestic investment, even though tax income generation is essential for public funding. To guarantee revenue growth without deterring private investment, it suggests larger tax bases through formalisation of the informal economy, improved VAT administration, and moderate VAT policy. These results offer crucial policy insights for striking a balance between Tanzania’s investment-friendly tax regimes and fiscal sustainability study also recommended that, to lower business and individual tax burdens and draw in potential investors, the Tanzania Revenue Authority must restructure an appropriate corporate income tax policy. The VAT should be levied at a moderate rate, and the government can expand the tax base by formalizing Tanzania’s sizable informal sector.