The first and foremost concern of gov. is to contain the inflation and in this regard they have revised the monetary policy and presented further tighting directives. As all economics students must know that making changes only in the monetary policy does not give fruitful effects but the fiscal policy should be in accordence with that. If they would have tightened the monetary policy and on the other hand would have showed an increase in aggregate demand by giving subsidies or by any other means, then the tight monetary policy would altough be effective for the short term but in the long run the inflation would have further risen.

For Pakistan the Threshold inflation rate is calculated at 9% and in order to achieve that growth should be slowed down in every means.

Increasing tax for a couple of hundred luxury import products hardly has any impact on macro economic behaviour, I guess the goal is to protect internal markets with those taxes.

But there are serious side effects in increasing tax that should not be taken lightly. Any economy student familiair with the work of John Maynard Keynes knows how tax changes greatly influence the behaviour, production and consumption of man. There’s a lot to consider.

What I know from reading newspapers is that when the regular sales tax goes up with a percent (up to 16 %) it is likely that most prices will go up a little more higher than a percent (like up to 17,5 %). Shops will recalculate prices they tag their products with once tax increases, and that usually is a bit more than the tax increase. If you don’t increase wages then extra sales tax will lead to less consumption, which could be seriously damaging to markets that are under pressure already.

I was just wondering if in Pakistan there is only one sales tax percentage to apply? In my country we have three rates for sales tax:

0% - for trading abroad, foreign countries
6% - for food, healthcare, books
19% - for all other, regular sales tax

Where I live we will add another percent to the high rate next year too (change the 19% rate into a 20% rate). However, the lower rate remains the same (6%). That way all products that are needed for food and medicine do not change in price.