Question

Explain the implications of a 5% VAT removal and excise tax on petroleum products along the following lines

i. horizontal equity

ii. vertical equity

iii. Efficiency

Answer 1

i. Horizontal Equity

Horizontal equity requires equal treatment of individuals or families in similar situations with equal pay ability to pay equal amount of taxes. So, removal of 5% VAT and Excise Tax will have similar effect on taxpayers which means those section of people who pay more of these taxes will get direct benefit and those who do not pay more of these taxes will not be affected much either.

ii. Vertical Equity

Vertical equity means that taxes are charged on the basis of the ability to pay. Ability to pay is generally defined in terms of income earned by individual or famlies. It mainly focusses on the impact of taxes on families with different incomes. Usually, middle and lower income earning families use and pay more for essentials which results in them paying more taxes on sales and excise than high income families. So, removal of 5% VAT and Excise Tax will benefit the middle and lower section of people.

iii. Efficiency

VAT and excise duty has a cascading effect i.e. the tax is levied each time a product changes hands from manufacturer to wholeseller and then to retailer and so on. Due to this middlemen involvement in supply chain, the taxes magnifies to huge amount on reaching to the consumers which make the products expensive for them.

Thus, removal of 5% VAT and Excise Tax will help the consumers to save on taxes and will benefit them by letting them pay lower price for their products. This will make the whole taxation system more efficient and help in its smooth running.