Estimating The Distributional Burden Of Indirect Taxes In Pakistan

Theme/Relevant Ministry:

M/o Finance; FBR

Project Brief:

Pakistan’s tax regime heavily relies on indirect taxes that constitute 60 percent of total tax receipts. This research assess who bears how much burden of these taxes. This research examines the extent of overall incidence and the distributional burden of General Sales Tax (GST), levied at domestic production and sales, across deciles of household expenditures for the year 2018-19. The research uses an input-output model based approach as it allows tracing the cascading effect of indirect taxes. Hence, even if final product is exempted from tax, it incorporates the impact of taxes levied on intermediate inputs it uses. 

The research estimates the incidence of GST from various perspectives that is: (1) for the country overall and by rural-urban areas, (2) by commodity groups for the country as a whole.

The results show that overall incidence of GST is on average 6.7 percent in Pakistan. The distribution of incidence of GST is regressive across the board and as well as by rural and urban areas.  Analysis by commodity groups indicates that basic food items bear the highest magnitude of incidence and display highest extent of regressivity across all deciles.

This regressivity suggests that the poorer segments of society relatively bears the greater burden of GST in Pakistan.

Public Policy Relevance:

This research assesses the overall incidence and the distributional burden of indirect taxes in Pakistan across deciles of household expenditures. This research uses an input-output model-based approach to incorporate this feature. The findings provide the government options to address the distributional impact of indirect taxes and formulating equitable taxation policy.

Unedited Working Paper and Policy Brief prepared for the Second RASTA Conference can be downloaded from the link:

CGP 02-094
Iffat Ara
PhD Scholar, Applied Economics Research Centre (AERC), University of Karachi (PI)
08 months
Rs. 1,800,000/-