Why Food Tax Exemptions May Fail the Poor: Lessons From Papua New Guinea’s VAT Experiment

Papua New Guinea’s $150 million food VAT exemption largely favored wealthier consumers and competitive urban markets, while the poorest 40% received only about 16% of the foregone revenue. The study suggests governments should prioritize better-targeted social protection, stronger retail competition and improved price monitoring to ensure fiscal support reaches vulnerable households.

Governments widely use food tax exemptions to shield low-income families from rising living costs, but new research from the World Bank, the University of Melbourne, the Institute for Fiscal Studies, the University of California, Santa Barbara, and the University of Papua New Guinea suggests these policies can produce very different results. Evidence from Papua New Guinea shows that removing taxes from essential foods reduced prices substantially in competitive urban supermarkets. Yet, poorer households received only a small share of the fiscal benefit.

Papua New Guinea removed its 10 percent Value-Added Tax (VAT), locally known as Goods and Services Tax, from ten food categories in June 2025. These included rice, cooking oil, flour, chicken, noodles, biscuits, tea, coffee, tinned fish and tinned meat. The exemption was scheduled to remain for 19 months and was estimated to cost the government about $150 million in foregone revenue.

Tax Relief Reached Markets Unevenly

Removing a 10 percent VAT should reduce the tax-inclusive price by about 9.1 percent when businesses pass the entire tax saving to consumers. Researchers found that this happened almost completely in highly competitive formal supermarkets in central Port Moresby.

But the national picture was significantly different. Average pass-through in formal stores was estimated at 64 percent, while formal stores in urban areas recorded more than 80 percent. Price effects were minimal in rural areas and informal stores.

Competition appears to explain much of the difference. In highly competitive parts of Port Moresby, supermarkets were on average only around 150 metres from their nearest competitor. Businesses facing nearby rivals had stronger incentives to reduce prices. Retailers operating with less competition were able to retain more of the tax saving.

This means governments cannot assume that removing a tax automatically produces an equivalent reduction in consumer prices. Market structure, competition and retailer formality can determine whether fiscal relief reaches households.

Poorer Families Captured a Smaller Share

The biggest concern is how the benefits were distributed. Around 85 percent of Papua New Guinea's population lives in rural areas, where subsistence agriculture and informal markets remain important.

Among households in the poorest quintile, roughly two-thirds of consumption came from their own production, compared with about one-third among the richest quintile. Less than 20 percent of food purchases by the poorest households were made at formal stores, against more than 40 percent among the richest.

As a result, the poorest 40 percent received only about 16 percent of the foregone revenue, while the richest 40 percent captured roughly 40 percent.

Researchers estimate that only around 64 cents of every dollar of foregone revenue reached consumers through lower prices. The remaining 36 cents were retained somewhere within stores, wholesalers or other parts of the supply chain.

For governments, the finding highlights an important distinction between making a product tax-free and delivering targeted support to vulnerable households.

$150 Million Raises a Fiscal Choice

The study estimates that Papua New Guinea's approximately $150 million tax exemption delivered only around $12 million to households in the poorest quintile.

Alternative approaches could potentially deliver similar assistance at a lower fiscal cost. According to the study's illustrative calculations, a perfectly targeted cash transfer could provide the poorest quintile with the same $12 million benefit for $12 million. Even a universal cash transfer requiring no income targeting could deliver the equivalent benefit for around $60 million.

For governments operating with limited fiscal space, this creates a major policy question. Revenue sacrificed through broad tax exemptions cannot simultaneously finance health, education, nutrition, infrastructure or targeted social-protection programmes.

International development partners can help governments build stronger social registries, payment systems, household databases and tax-administration capacity. Better price monitoring could also show whether retailers actually reduce prices after tax changes.

However, shifting from exemptions to direct transfers requires caution. Governments with high informality and limited administrative capacity may struggle to identify beneficiaries and deliver payments reliably. Any transition therefore needs to consider coverage, administrative costs and potential exclusion of vulnerable households.

Competition and Better Targeting Point the Way Forward

The findings also matter for private businesses. Formal retailers in competitive markets may face stronger pressure to pass tax reductions to consumers, while businesses operating in less competitive areas may retain more of the benefit.

Expanding formal retail networks, improving transport and distribution systems and increasing market competition could therefore strengthen the effectiveness of future tax measures. Digital price-monitoring systems could allow authorities to track whether tax reductions reach consumers across different regions.

Political realities cannot be ignored. More than 70 percent of surveyed respondents identified VAT exemptions as their first or second preferred policy for supporting poor and middle-class families, suggesting that replacing them could face resistance even when alternative programmes are better targeted.

The Papua New Guinea results should not automatically be applied to every developing economy. The researchers could not determine exactly how benefits retained within the supply chain were divided among retailers, wholesalers and other intermediaries, while market conditions differ across countries.

However, it is important for policymakers and development partners: before spending large amounts of public revenue on food-tax exemptions, governments should understand who buys the products, where they shop, whether sellers operate inside the tax system and whether competition is strong enough to translate tax cuts into lower prices. In lower-income economies, better targeting and stronger markets may ultimately matter more for poverty reduction than simply making essential food tax-free.