THE IMPACT OF VALUE ADDED TAX (VAT) ON THE CONSUMPTION PATTERN OF LOW-INCOME EARNERS

Value Added Tax (VAT) has emerged as a dominant revenue source in over 175 countries globally, yet its regressive nature raises critical concerns about the welfare of low-income households who spend proportionally more of their income on consumption. This monograph comprehensively examines the impact of VAT on the consumption patterns of low-income earners, drawing on recent empirical evidence from 2020 to 2025 across multiple jurisdictions including Vietnam, Sri Lanka, Indonesia, South Africa, Thailand, Nigeria, and the United Kingdom. The research aims to investigate how VAT policy mechanisms affect household consumption behavior among economically vulnerable populations. Three specific objectives guide this inquiry: (1) to analyze the regressive burden of VAT on low-income households and its effect on essential versus non-essential consumption; (2) to evaluate the effectiveness of VAT exemption and zero-rating policies in protecting low-income consumer welfare; and (3) to assess how VAT rate changes influence the consumption adjustment strategies of low-income earners. Employing a mixed-methods approach synthesizing peer-reviewed research, World Bank reports, and policy evaluations, the study finds that VAT disproportionately burdens low-income households, who typically spend 5-10% of their income on VAT compared to 1-4% for high-income households (World Bank, 2025). However, evidence from Vietnam's temporary VAT reduction demonstrates that low-wealth households are most responsive to VAT relief, showing 8 percentage points higher likelihood of increasing durable goods spending when fully aware of tax changes (Trinh, 2025). The study further reveals that well-designed exemption policies, particularly on essential food items, can significantly benefit poor households, with simulation models showing poor household consumption gains 0.37% annually under VAT exemption scenarios—more than double the rate of non-poor households (Chad Ministry of Finance, 2024). Nevertheless, zero-rating policies face criticism for delivering only modest absolute benefits to the poor while substantially benefiting higher-income groups (Badenhorst, 2025). The monograph concludes by proposing a balanced policy framework that combines targeted exemptions, transparent revenue recycling, and gradual rate adjustments to protect low-income consumers while maintaining fiscal sustainability. Recommendations include expanding essential food exemptions, implementing direct compensation mechanisms, and avoiding abrupt VAT increases without complementary social protection measures.
Keywords: Value Added Tax (VAT), low-income households, consumption patterns, regressive taxation, tax exemptions, consumer behavior