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POTENTIAL IMPACT OF THE INCREASE IN VAT ON POOR HOUSEHOLDS IN BOTSWANA

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Author(s): L. Sekwati | Brothers W. Malema

Journal: International Journal of Economics and Research
ISSN 2229-6158

Volume: 02;
Issue: 01;
Start page: 47;
Date: 2011;
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Keywords: Value Added Tax | Household Consumption | Poor Household

ABSTRACT
In this article, we examine the potential impact of the increase in Value Added Tax (VAT) on Household Consumption in Botswana. The paper derives motivation from the recent increase in VAT from 10% to 12%. The increase was necessitated by among others the need to find alternative ways of financing the 2010/11 budget deficit in light of the difficult revenue situation faced by Botswana following the global economic meltdown, with real GDP declining by 4.6% in 2009 as a result. Notwithstanding the elasticity of demand and supply, generally an increase in VAT is likely to increase prices of consumption goods and services, as suppliers ordinarily shift the tax to consumers. Given that low income groups have a higher marginal propensity to consume, it is highly likely that poor households will be more affected than other sections of the population. For middle to upper income classes, the effect may be negligible given that they have degrees of freedom to adjust their consumption patterns in response to the increase in VAT.
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