This study aims at measuring the social incidence of indirect taxes in Pakistan
as a result of the tax reform process specifically carried out in the area of
indirect taxes (1990-2001). The intention is to analyze how indirect tax reform
reflects the policy objectives particularly in the light of equity and
distributional considerations envisaged in the tax reform strategy. Whilst one
aim is to reflect on the aggregate indirect tax incidence overtime at the
national as well as the urban/rural level, the second objective is to provide a
high level of disaggregation of incidence picture in order to explore the
sensitivity of tax incidence in terms of key commodities. Additionally, this
study attempts to illustrate the sensitivity of estimated tax incidence results to
the assumption of zero demand responses and to identify welfare enhancing
directions of tax reform for Pakistan at the margin by using the marginal
theory of tax reform.
The findings of this study seem to indicate that a move from dependence on
trade tax revenues to GST/VAT revenues for Pakistan has made the overall
indirect tax system a little more progressive. It appears post- reform indirect
tax incidence is sensitive to taxation of key commodities including sugar,
edible oils and basic fuel/utilities. Incidentally, taxation of these commodities
also appears to have strong distributional effects on the poor. Whilst exploring
the sensitivity of estimated tax incidence results to the incorporation of
behaviour responses, our estimated results do not appear to be very sensitive
to this incorporation. Furthermore, directions of welfare enhancing tax reform
(at the margin) for Pakistan reveal that a reduction in the price of basic food
(including beef, wheat, milk and pulses) should be welfare enhancing; taxation
of sugar maybe efficient but not equitable, while only taxation of vegetable
ghee simultaneously fits both criterion.