Effect of indirect taxes on trade in Sub-Saharan Africa

Abstract

The study explores the effect of indirect taxes on trade in Sub-Saharan Africa. The motivation of this study results from the adoption of Tax Reforms through the IMF and World Bank’s Structural Adjustment Programs (SAPs) which involved the restructuring of taxes from international trade taxes towards domestic revenue mobilization to finance economic growth of Sub- Saharan Africa. The System GMM estimator was utilized with a sample of 40 Sub-Saharan countries over the period of 1990 to 2022. Data was sourced from the World Development Indicators and UN-Wider Government Revenue Dataset. The results reveal that total indirect taxes reduce trade of Sub-Saharan African countries. Specifically, results also show that import duty reduces their trade. However, Value Added Tax is associated with an increase in trade of Sub-Saharan Africa. This is because VAT is a destination-based tax charged on essential goods and services, an extra increase in VAT may not necessarily reduce the demand of this good but rather the rate at which the good is demanded and given the import-based nature of Sub-Saharan African economies, consumers’ demand of a good due to increase in VAT may not decrease the consumption of that commodity because it is scarce hence producers will continue to import such commodities. The study recommends that Sub-Saharan African governments carefully ascertain the types of taxes imposed on goods and services in order not to affect their trade negatively. Keywords: Indirect taxes, Tax Reforms, Trade, Sub-Saharan Africa.