A recent study by the World Bank reveals that Pakistan’s General Sales Tax (GST) has the largest marginal contribution to the national poverty increase. The report, titled “The Effects of Taxes and Transfers on Inequality and Poverty in Pakistan,” indicates that GST payments account for over 7 percent of households’ pretax expenditure, leading to further impoverishment among poor and vulnerable households.
The study underscores that while GST is neither strongly regressive nor strongly progressive in its allocation, being roughly proportional to consumption expenditure, its significant burden on household spending disproportionately impacts the less affluent. In stark contrast, the Benazir Income Support Programme (BISP) cash transfer demonstrates the largest positive marginal contribution to inequality reduction, with the second-largest impact coming from pre-primary and primary education expenditures.
Vulnerable Households Are Net Payers into the System
The World Bank’s analysis shows that most poor and vulnerable households in Pakistan are net payers into the fiscal system. This means that the benefits they receive from government programs are smaller in magnitude than the taxes they pay. Only individuals from the poorest ten percent of the population can expect to be net recipients, with a net cash gain estimated at 1.2 percent of pre-fiscal income. All other individuals, including those slightly above the poverty line, can expect to be net payers in cash terms, with losses ranging from -1.8 percent in the second decile to -5.5 percent in the richest decile (decile 10).
The report critically states that Pakistan’s fiscal policy has historically “emphasized revenue collection from more frequently-impoverishing indirect taxes as well as regressive and inefficient subsidy expenditures to provide benefits while de-prioritizing progressive direct taxation which can shield poor and vulnerable households from further impoverishment, direct, targeted transfers to poor and vulnerable households, and the investments in social infrastructure which help poor and middle-income households participate productively in social, civic, and economic life.”
Furthermore, the study points out that richer households disproportionately capture a larger share of available subsidies and in-kind benefits. For instance, in fiscal year 2019, the two richest deciles accounted for 34 percent of total subsidy expenditure, 29 percent of in-kind education benefits, and 27 percent of in-kind health benefits, while paying 40 percent of total revenues from indirect taxes.
Recommendations for Fiscal Equity and Sustainability
Moving forward, the study strongly suggests that Pakistan should prioritize improving its domestic revenue mobilization and public expenditure efficiency to generate greater fiscal space. This additional fiscal space, the report argues, should be strategically prioritized to expand social expenditure, increase targeted transfers, and improve overall fiscal equity.
The World Bank report asserts that fiscal sustainability can go hand-in-hand with fiscal equity if additional revenues collected from GST harmonization are deliberately used to compensate poor and vulnerable households through well-targeted cash transfers. Moreover, expenditure reforms aimed at improving the accessibility and quality of public health and education services in Pakistan could yield long-term impacts in terms of poverty and inequality reduction.
The findings highlight a persistent challenge for Pakistan, which has struggled with low and volatile economic growth over the past two decades. The study provides a clear directive for policymakers to re-evaluate the impact of indirect taxation on poverty and shift towards a more equitable and poverty-reducing fiscal strategy.