Tax Revenue Sustainability and ICT Adoption: Evidence from ARDL and Markov Chain Models

Abstract

In contemporary society, Information and Communication Technology (ICT) is widely recognised as an important tool for improving tax administration and revenue mobilisation. However, empirical evidence on the impact of ICT adoption on tax revenue remains inconclusive, with existing studies reporting mixed findings. Against this background, this study examines the long-run and short-run relationships between ICT investment, ICT imports, internet usage, broadband penetration, economic growth, and tax revenue in Tanzania over the period 1997–2022. The study employs the Autoregressive Distributed Lag (ARDL) bounds testing approach to examine cointegration and estimate dynamic relationships, complemented by a Markov Chain model to assess the sustainability of tax revenue over time. The ARDL bounds test results confirm the existence of a long-run relationship among the variables. Long-run estimates indicate that ICT investments, ICT imports and broadband penetration have a positive and significant influence on tax revenue, while internet usage has a negative effect, highlighting challenges associated with taxing digital economic activities under existing tax systems in developing countries. Economic growth is found to positively influence tax revenue, reinforcing its role as a key macroeconomic control factor. The Markov Chain analysis reveals that tax revenue converges to a stable state after approximately four years, with a 0.628 probability of remaining in an increasing revenue state and a 0.372 probability of transitioning to a declining state. These findings suggest that while ICT adoption can enhance tax revenue sustainability, its effectiveness depends on complementary policy and institutional reforms. The study recommends that governments strengthen digital tax administration systems, modernise tax laws to accommodate online transactions, and integrate ICT strategies into fiscal planning to improve long-term revenue performance. Keywords: Tax revenue; ICT adoption; ARDL model; Markov chain model