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Using computerized information to enforce VAT: Evidence from Pakistan

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  • Shah, Jawad

Abstract

I test the efficacy of VAT’s in-built third-party information trail, together with electronic filing, to deter tax evasion in a low state capacity environment. Using a reform which utilizes information beyond the VAT trail and authorizes a computerized risk analysis system to accept or reject tax credits in real time, my difference-in-differences estimates show that claims declined by 50%. Based on firm heterogeneity, the response ranges from 30%–90%. Approximately 10% of treated firms were fake, created for missing trader fraud. The lower bound estimate of increase in net VAT collection at the country level is 10%. I find that traditional VAT enforcement mechanisms of cross-matching, audit and recovery fail to deter evasion in developing countries but a risk-based real-time enforcement system is effective.

Suggested Citation

  • Shah, Jawad, 2026. "Using computerized information to enforce VAT: Evidence from Pakistan," Journal of Development Economics, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:deveco:v:178:y:2026:i:c:s0304387825001464
    DOI: 10.1016/j.jdeveco.2025.103595
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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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