Abstract: The study analyzed the relationship between indirect taxes and government expenditure of Nepal using time series data from fiscal year 1974/75 to 2017/18. The specific objective was to determine the impact of value added tax, excise and custom duties on government expenditure of Nepal. Data were extracted from ministry of finance, Government of Nepal. The study adopted ex-post facto research design. The sourced data were analyzed using Augmented Dickey-Fuller Test to test for stationarity of the data while ordinary least square based multiple regression technique was used to determine the relationship between the variables.
The findings revealed that VAT and excise duties have positive and statistically significant impact on Government expenditure while custom duties has positive and insignificant impact on Government expenditure of Nepal. CUSUM and CUSUMSQ tests were performed to examine the structural stability of parameter. The result documented no evidence of misspecification and instability during the period estimated by the model. Residuals are free from serial correlation, heteroscedasticity, multicollinearity and are normally distributed. We recommend that Government should effectively and efficiently collect all forms of indirect tax revenue and be cautious on expenditure. Further, the numbers of goods on the VAT list should be increased and the burden of custom duties should be lessened on infant industries.