| Abstract: | Today the role of economic growth for its effect on social welfare is undeniable. For this reason, the factors influencing the economic growth are taken into account by policy makers and researchers. Indirect taxes, as sources of nation's revenue, have been considered by most countries for its numerous advantages and benefits. This study investigated the relationship between indirect tax and economic growth in Ethiopia for the period 1990 to 2016. Time series secondary data on GDP, indirect tax revenue, total tax revenue excluding indirect tax revenue and inflation for the period 1990 – 2016 from Ministry of Finance and Economic Development of Ethiopia (MoFED), Ethiopian Revenues and Custom Authority (ERCA) and World bank (world development indicators) were analyzed using descriptive statistics and Johansen co-integration approach and vector error correction model. The finding of the study revealed that indirect tax revenue boosts economic growth in general. However, there is poor administration and unsystematic exemptions resulting in regressive outcomes. For the period under review the average ratio of indirect tax revenue to GDP becomes 6.4% and the growth rate of indirect tax revenue was 17.35%. The result from Johansen co integration revealed that 65.85% of the disequilibrium errors for the co-integrating variables are corrected in a time period. The result from vector error correction model also showed that, indirect tax revenue, total tax revenue excluding indirect tax revenue has a positive and significant effect on economic growth while inflation affected GDP negatively at 5% level of significance. Therefore, to be effective, it requires strong tax administration, cooperation of the tax payers with taxing authority and the government in general. In the study the literature claims that indirect taxes are one of the reasons for the gap between poor and rich classes of people that can be minimized by decreasing the dependency on indirect taxes and increasing the collection of direct taxes |
