Production VAT elasticity on Nepalese economy without agriculture

Abstract This paper aims to investigate the flexibility of production Value Added Tax (PVAT) on Nepalese economy (excluding agriculture) by analyzing its impact on the production sector's Gross Domestic Product (PGDP). The study utilizes an explanatory research design to determine the relationship between PVAT and PGDP, exchange rate, market capitalization, money supply, and government spending as intervening variables. To establish a cointegrated regression model with time series data for the 20-year period from 2003/04 to 2022/23, a model specification is employed. The variables are converted into real prices using the GDP deflator, with the GDP deflator and CPI year 2013/14 considered equivalent to the base year 2013/14 according to the Nepalese fiscal year. Due to the presence of non-normal distribution, autocorrelation, and multicollinearity issues in the model, the data is transformed into first differences, and an error correction model is run. The F-test is significant at a confidence limit of over 99 percent, while the coefficient of determination is 0.245, indicating that 24.5 percent of the variations in the production sector PGDP are explained by the variables included in the regression model.  Keywords: Elasticity, production, GDP, VAT, Economy