View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by OpenGrey Repository Social Incidence of Indirect Taxation in Pakistan (1990 – 2001) Saadia Refaqat A thesis submitted for the degree of Doctor of Philosophy University of Bath Department of Economics and International Development April 2008 COPYRIGHT Attention is drawn to the fact that copyright of this thesis rests with its author. This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognise that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the prior written consent of the author. This thesis may be made available for consultation within the University Library and may be photocopied or lent to other libraries for the purposes of consultation. Singature: ______________________________________________________ I Table of Contents Table of Contents ..........................................................................................II List of Tables ........................................................................................... VI List of Figures .........................................................................................VIII Dedication ........................................................................................... IX Acknowledgments.........................................................................................X Abstract ..........................................................................................XII List of Abbreviations.................................................................................XIII CHAPTER I: Introduction......................................................................... 1 1.1 Aims of the study...................................................................... 1 1.2 Methodology............................................................................. 4 1.3 The plan of the study................................................................. 6 CHAPTER II: Taxation in Pakistan (1985 – 2001) .................................... 9 2 Introduction............................................................................... 9 2.1 Why Reform?.......................................................................... 13 2.1.1 Internal factors................................................................... 13 2.1.1.1 Economic Factors.......................................................... 13 2.1.1.2 Political Factors............................................................. 16 2.1.2 External Factors................................................................. 17 2.1.2.1 Gulf War........................................................................ 18 2.1.2.2 International Monetary Fund......................................... 18 2.2 Nature and Direction of Tax Reforms..................................... 20 2.3 Trends in Pakistan’s Public Finance: Before and After the Tax Reform process........................................................................ 23 2.3.1 Direct Taxes ...................................................................... 24 2.3.2 Indirect Taxes.................................................................... 29 2.3.2.1 Custom Duties .............................................................. 30 2.3.2.2 Sales Tax ....................................................................... 39 2.3.2.3 Excise Duties................................................................. 45 2.4 Conclusion............................................................................... 47 CHAPTER III: Literature Review.............................................................. 50 3 Introduction............................................................................. 50 3.1 SECTION I: Partial Equilibrium Tax Incidence Analysis..... 52 3.1.1 Tax Incidence approach but which one?........................... 52 3.1.2 Conventional Models of Partial Equilibrium Tax Incidence ........................................................................................... 55 3.1.2.1 Representative or typical household approach.............. 55 3.1.2.2 Differential incidence approach .................................... 55 3.1.2.3 Numerical Tax Incidence Approach ............................. 56 3.1.3 Tax incidence analysis: other issues.................................. 58 3.1.3.1 Annual or lifetime Perspective on Incidence?............... 58 II 3.1.3.2 Tax shifting Assumptions ............................................. 59 3.2 SECTION II: Tax Progression and Evidence ......................... 63 3.2.1 What can be learned from evidence on tax progression and distribution: some general conclusions ............................. 63 3.2.2 Pakistan Tax Incidence Studies......................................... 73 3.3 SECTION III: Normative Analysis ........................................ 77 3.3.1 Optimal Taxation............................................................... 77 3.4 SECTION IV: Marginal Theory of Tax Reform: A Bridge between Positive and Normative Analysis.............................. 82 3.5 SECTION V: Conclusion........................................................ 88 CHAPTER IV: Data Issues and Methodology ........................................... 91 4 Introduction............................................................................ 91 4.1 Data and related issues............................................................ 92 4.1.1 HIES (1990-91) and (2001-02): Developments over time 94 4.2 Issues in Constructing Household Welfare Aggregate using HIES data ................................................................................ 98 4.2.1 Unit of Analysis ............................................................... 98 4.2.2 Per Capita or Adult Equivalent ......................................... 98 4.2.3 Measurement of Household Welfare................................. 98 4.2.4 Measurement of Household Consumption aggregate?.... 100 4.2.4.1 What is included in Household Consumption aggregate? ...................................................................................... 101 4.2.4.2 Dealing with Household durable expenses ................. 101 4.2.4.3 Cost of living adjustment ............................................ 102 4.2.4.4 Inflation adjustment between Surveys ........................ 106 4.2.4.5 Total Sample Size........................................................ 106 4.3 Household Expenditure Analysis (1990-91 & 2001-02)....... 107 4.3.1 National Expenditure Comparison.................................. 107 4.3.2 Rural and Urban Expenditure Comparison..................... 111 4.4 Selected Commodity Expenditure Analysis (1990 – 91) & (2001 – 02) ............................................................................ 114 4.5 Conclusion............................................................................. 118 CHAPTER V: Social Incidence of General Sales Tax (GST) in Pakistan (1990-91) & (2001-02).................................................... 119 5 Introduction........................................................................... 119 5.1 GST Incidence....................................................................... 120 5.1.1 Description of GST ......................................................... 120 5.1.2 Estimation of GST/VAT amounts................................... 122 5.1.3 Progressivity, Regressivity or Proportionality of tax...... 123 5.1.4 National GST Incidence.................................................. 123 5.1.5 GST Incidence: Urban and Rural Areas.......................... 127 5.2 Selected Commodity Incidence Analysis.............................. 130 5.3 Analysis of GST exemptions using Distributional Characteristics of a good approach ....................................... 139 5.4 Conclusion............................................................................. 146 III Chapter VI: Overall Indirect Tax Incidence in Pakistan (1990 – 2001) ......................................................................................... 149 6 Introduction........................................................................... 149 6.1 Custom Duty Incidence (1990-91) to (2001-02)................... 150 6.1.1 Measuring Imports Content (IMPCON) within Domestic Consumption ................................................................... 150 6.1.2 Additional data sources used for calculating IMPCON.. 151 6.1.3 Additional assumptions................................................... 152 6.1.4 Custom duty rates............................................................ 153 6.1.5 Estimating Custom duty amounts and incidence ............ 154 6.1.6 Empirical Results ............................................................ 155 6.1.6.1 Custom Duty Incidence (1990-2001) at national level 155 6.2 Central Excise Duty (CED) Incidence (1990-91) to (2001-02) ............................................................................................... 158 6.2.1 Description of Central Excise Duty ................................ 158 6.2.2 Further Assumptions....................................................... 160 6.2.3 Calculating payable excise duty and incidence............... 162 6.2.4 National CED Incidence (1990-91) & (2001-02) ........... 163 6.2.5 Selected Excise Duty Commodity Incidence.................. 166 6.3 Total Indirect Tax Incidence for Pakistan (1990-91) to (2001- 02).........................................................................................