# **7  Conclusion**

In 2012, the DRC enacted the value added tax, whose rate is uniformly fixed at 16 percent with zero-rating basic commodities, including bread, rice, and meat. Although, this VAT reform was crucial to stemming the fiscal deficit, it could adversely erode household real income. In this paper, we examined the welfare and distributional impacts of the tax reform. We further investigated whether the exemptions are well-targeted.

The current study finds a 10 and 12 percent loss in real expenditure induced by a statutory tax rate of 8 and 12 percent, respectively. Our results are consistent with findings from the literature on the welfare implications of the introduction of the VAT, though with some differences in magnitude (N. Gemmell and O. Morrissey, 2003, S. M. Hossain, 1994, S. Muñoz and S. Cho, 2003, D. Newhouse and D. Zakharova, 2007). These results are low compared to a welfare loss between 11 and 19 percent subsequent to an increase of two-percentage points in the VAT rate in Lebanon reported by Salti and Chabaan (2008). The differences between the two sets of findings can possibly be attributed to the fact that the effective tax rate in the DRC is lower than in Lebanon. This also potentially reflects the fact that the exempted items are important consumption goods for the poor. Compared to findings from an impact analysis of tax reform in the Philippines, the welfare losses computed in this study are large (D. Newhouse and D. Zakharova, 2007). In this case, the discrepancies between the results from the two studies may be due to the focus of this study on direct effects without accounting for the effects of mitigating programs such as public transfer programs targeting the poor.

We also find that the VAT scheme is strongly progressive, with urban households bearing a higher tax burden than rural households. This finding echoes results from most studies on VAT impact (N. Gemmell and O. Morrissey, 2003, S. M. Hossain, 1995, D. Newhouse and D. Zakharova, 2007, N. Salti and J. Chabaan, 2008). What is important in the context of this study is the robustness of the VAT progressiveness even when we do not take into consideration the indirect effects of the VAT.

Overall, exempted goods constitute a large budget share among the poor (at least 79.4 and 79.8 percent of the food budget shares of the rural and urban poor, respectively). Although we have not implemented a very detailed analysis of exempted goods, it is hoped that exemptions can be refined to better help the poor by further subsidizing luxury goods that are important on nutritional grounds (for example, meat and fish, which tend to be luxury goods). In addition, the adoption of the VAT led to a worsening of the food poverty headcount by 1.2 to 1.4 percentage points.

The current analysis provides nationally representative estimates, which does not fully reflect regional specificities. Nor does it account for general equilibrium effects resulting from the VAT reform. These two points highlight the need for an analysis of the data disaggregated at the regional level. They also underscore the need for an analysis that accounts for macro level interactions with respect to the impacts of the VAT reform.

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