Microeconomic Impact of GST on Household Consumption Patterns in Pakistan

Zahid Iqbal, Muhammad Salahuddin Ayyubi, Abdul Farooq and Sumaira Lodhi

Abstract

This study is aimed at examining the impact of GST (General Sales Tax) insinuation on household consumption and social welfare in Pakistan with a special focus on indirect tax reforms in the country. Deterministic simulation experiments with different rates of GST were carried out for tax policy implication in the country. The results suggested that the government can raise tax revenue by raising price of food as it came out to be a good nominee for taxable commodities. Health related expenditure by households was also inelastic in nature, therefore, the study proposed that taxes must be imposed on goods that have relatively inelastic demand as the marginal cost of tax rate and social welfare loss is minimum in case of inelastic goods. Results from simulation and inequality aversion showed that consumer price of food need to be decoupled which is not possible in case of Pakistan. However, social inequality will upsurge as food is a necessity and when tax is imposed on the necessities, poor sections of the society become more vulnerable. As regard the tax policy implication, GST in VAT (Value Added Tax) mode should be more adopted because of its less distortionary nature as it is imposed on both goods and services and helps in widening the tax base.