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PSIA: A Suggested Framework with Application to VAT in Bangladesh


Tuesday, January 13, 2004
12:30 - 2:00 PM
Presenter: Shahabuddin M. Hossain (African Dept, IMF)

This paper reviews some of the major techniques and frameworks for assessing the PSIA. It highlights their strengths and weaknesses and suggests a relatively simple analytical framework for the PSIA based on household survey data.

The paper then shows how the suggested framework could be utilized to investigate the poverty/income distributional implications of introducing a value-added tax (VAT) in Bangladesh. The results indicate that a revenue-neutral uniform VAT is regressive in its impact on different households. In order to mitigate the adverse impact, the paper explores the distributional impact of an alternative policy package consisting of a basic rate of VAT with exemptions and excise taxes for certain commodity groups chosen on the basis of their distributional characteristics. The distributional consequences of the alternative package are found to be superior to those of the uniform VAT.

The paper contributes to the growing body of literature on PSIA by showing how a quantitative framework based on a welfare measure that incorporates the demand response of a price change can be utilized to assess the impact of discrete policy changes on different household groups in the economy.

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