Does Digital Financial Development Promote Tax to GDP Ratio in the South Asian Region? The Moderating Role of Governance

Abstract

This paper sheds light on digital financial development and its impact on the Tax-to-GDP ratio for the five South Asian countries. The panel pooled mean group, mean group, augmented mean group, and Dumitrescu Hurlin causality models applied to investigate long-run and short run relationship among the variables from 1990 to 2021. The results reveal that digital financial development significantly and robustly impacts the Tax-to-GDP ratio of the South Asian Countries in the long run. However, traditional financial development has failed to impact the region's Tax-to-GDP ratio significantly. The causality test results confirmed that digital financial development has a bi-directional causal link with the tax-to-GDP ratio in the short run. The governance indicator, rule of law also played a decisive moderating role in digital financial development to improve the Tax-to-GDP ratio for South Asian countries. The findings of GMM and DOLS are also constituent that digital financial development has a substantial and positive impact on Tax-to-GDP ratio. Thus, policymakers should be concerned about digitalizing financial sector activities to improve the tax-to-GDP ratio in the region through monitoring and tracking transactions.