Authors: Suhrab Khan, Muhammad Aamir Khan, Ihtsham ul Haq Padda, and Muhammad Iftikhar ul Husnain
Year: 2021, Volume 21 Number 3
Pages: 229 – 248
The current GST regime in Pakistan is characterized by various tax exemptions, reduced tax rates, and zero ratings. It creates inefficiency, supports tax fraud, and encourages rent-seeking activities. The net effect is the high tax rates and tax evasion, undermining the potential indirect tax revenues. There are various recommendations from public economists, international agencies, and the industrial sector to reduce the current GST from 17% to single-digit and abolish all kinds of tax exemptions and zero ratings to make it dynamically efficient and pro-growth. With this backdrop, we quantify the likely impacts of uniform GST on macroeconomic aggregates, households’ income, and income inequality of Pakistan by employing a global computable general equilibrium (CGE) model. CGE models are standard models for economy-wide empirical analysis, and it is widely employed to analyze tax reform and development planning. We have applied 5%, 10%, and 15% uniform GST on the broader base (i.e., leather, textile, carpets, surgical goods, and agriculture sector) instead of a non-uniform GST regime. The simulation results show that uniform GST has a positive impact on economic growth and tax revenue. The sectoral analysis also indicates that the reduction in GST helps develop the domestic industries leading to an increase in the exports of the manufacturing sector. However, the export of agriculture-related products has fallen. Moreover, these policy reforms negatively impact low-income households, especially labor and capital associated with the agriculture sector, thus worsening income inequality. Based on empirical investigation, this paper suggests the implementation of uniform GST in Pakistan. However, to ameliorate the income distribution, the government should increase the reliance on progressive taxes such as wealth, income, and corporate taxes.
Keywords: GST, CGE model, GTAP, Inequality, SAM, Pakistan