Impact of Sales Tax Reduction on Pakistan`s Economy

Abstract

This paper studies the impact of reducing sales tax on macroeconomic variables like gross domestic product, national income, imports, exports, the balance of trade, private and public sector investment in the economy of Pakistan by using computable general equilibrium (CGE) model on the country`s latest available social accounting matrix (SAM) 2010-11. Previous studies have been designed to isolate to impact of indirect (sales) tax on some single, two, or three variables of the economy whereas, this investigation covers the impact on almost all the major macroeconomic indicators in context of one model. To examine the impact, simulations of 5% and 10% reductions on eminent macroeconomic indicators are performed. The experiment shows positive impact on all the above mentioned variables except a very few. In the light of these observations, our study recommends that policy of reducing sales tax should steadily be implemented in order to achieve economic development and maintain macroeconomic stability in the economy of Pakistan.