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How to Enforce Value-Added Tax? The Role of Inter-Sectoral Linkages

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  • Hoseini, M.

    (Tilburg University, Center for Economic Research)

Abstract

Abstract: This paper models and empirically tests a self-enforcing feature of the value added tax (VAT) which is absent in the theory: An incentive that makes formal traders buy from suppliers who pay VAT too. In addition, it explores how the government can deploy this feature to enforce VAT more efficiently by reallocating the enforcement spendings among different sectors. The results suggest that the government should identify the non-compliant firms more strictly in the backwardly linked sectors {which buy their inputs from the others{ and focus on revealing within-firm information. In contrast, in forwardly linked industries, the government should zoom on double checking the transaction records with the corresponding input credit claims. Empirical evidence from Indian service sector enterprises strongly confirms the existence of VAT self-enforcement effect, even in the absence of government punishments.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2013-036.

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Date of creation: 2013
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Handle: RePEc:dgr:kubcen:2013036

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Web page: http://center.uvt.nl

Related research

Keywords: Value-added tax; Informality; Tax enforcement; Linkage analysis;

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  1. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  2. Wojciech Kopczuk & Joel Slemrod, 2006. "Putting Firms into Optimal Tax Theory," American Economic Review, American Economic Association, vol. 96(2), pages 130-134, May.
  3. Keen, Michael & Mintz, Jack, 2004. "The optimal threshold for a value-added tax," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 559-576, March.
  4. Emran, M. Shahe & Stiglitz, Joseph E., 2005. "On selective indirect tax reform in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 599-623, April.
  5. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," NBER Working Papers 15218, National Bureau of Economic Research, Inc.
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