The Impact of VAT Reforms on Poverty in Malawi

This study investigates the impact of Value Added Tax (VAT) reforms on Poverty in Malawi. Specifically, it examines the impact of VAT on food consumption, the effectiveness of current VAT exemptions in benefiting the poor, and the progressiveness of VAT using the Quadratic Almost Ideal Demand System (QUAIDS) model. The study estimates the price and income effects of VAT and analyses the Gini Coefficient, poverty headcount, and poverty gap. The research also simulates the impact of VAT reforms on different household strata. The results show that the non-poor benefit more from the fiscal expense, indicating that VAT is regressive in Malawi. Additionally, households in the first and second strata are more responsive to price changes in cereals and vegetables, while fats, meats, and cereals are the most responsive food products nationally. The study also investigates the negative impact of VAT exemptions on poor (rural) producers of exempted products. In terms of expenditure (income elasticities), the study finds that Milk, Fats, and Beverages are luxuries in Malawi while Cereals, Vegetables, Meats, and Fruits are necessities. The Malawi Integrated Household Surveys 2019/2020 (IHS5) is used as the primary data source. This study has significant implications for policymakers, as it provides evidence for the potential negative impact of VAT on poverty reduction in Malawi and the need for VAT reforms that prioritize the poor.