Working Paper: CEPR ID: DP14601
Authors: Mazhar Waseem
Abstract: I leverage a Pakistani tax reform that cuts the tax rate on the supply chains of five major industries of the country from 15% to 0% to cast light on the extent of, and mechanisms driving, VAT noncompliance in a representative emerging economy. I find that firms overclaim refunds by 22% and underreport domestic B2C sales by 43.5%. Together, this implies an evasion rate of 77% in the treated industries and 38% in the population. I explore the role of three mechanisms (1) the destination principle, (2) the last-mile problem, and (3) invoice mills in driving this noncompliance.
Keywords: VAT; tax evasion; firm behavior
JEL Codes: H25; H26; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| VAT rate reduction (H25) | input tax decline (H29) |
| VAT rate reduction (H25) | output tax decline (H29) |
| VAT rate reduction (H25) | reported purchases decrease (D12) |
| VAT rate reduction (H25) | sales decrease (L81) |
| VAT rate reduction (H25) | exports decrease (F14) |
| VAT rate reduction (H25) | non-export sales decrease (F14) |
| VAT rate reduction (H25) | VAT compliance improvement (H26) |
| invoice mills presence (Y20) | VAT fraud facilitation (H26) |