Differential Impact of Taxation on Food Items

Abstract

In Pakistan, essential food items are exempted from indirect taxes to avoid any subsequent increase in their prices, with the goal of protecting the poor from a regressive tax burden. Taxes on inputs such as on fuel and energy, however, are transferred to consumer prices and, due to cascading effects, can exert a burden on households. This study investigates the incidence of indirect taxes on essential and nonessential food items across households in Pakistan. To do so, we follow an input‒output multiplierbased approach that allows the measurement of the cascading effect of taxes. It employs the latest available edition of the Household Integrated Economic Survey (HIES) 2018-19 in order to observe household food expenditures. Our analysis establishes that there is an effective tax even on items that are ostensibly tax-exempt, implying that households pay taxes indirectly even on those items. The incidence of these indirect taxes on essential food items is regressive across all household deciles and the incidence of indirect taxes on nonessential items is progressive at high expenditure deciles but proportional in the lower-ranking expenditure deciles.