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VAT incidence in real VAT systems

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  • Brusco, Giacomo
  • Velayudhan, Tejaswi

Abstract

This paper studies the price impacts of Value Added Tax (VAT) in the presence of size-based exemptions, which are set relatively high in the firm-size distribution in developing contexts. In addition to the standard determinants of tax incidence, we show that pass-through of VAT to consumer prices will depend on the substitutability of registered and unregistered varieties of taxed goods, on pass-through at upstream stages, and on the extent of segregation between registered and unregistered supply chains. The exemption can also distort the quality of goods produced. We show that these mechanisms are empirically important in the context of a VAT in India, where those who consume at unregistered firms nevertheless bear some of the tax burden.

Suggested Citation

  • Brusco, Giacomo & Velayudhan, Tejaswi, 2025. "VAT incidence in real VAT systems," Journal of Public Economics, Elsevier, vol. 249(C).
    • Handle: RePEc:eee:pubeco:v:249:y:2025:i:c:s0047272725001458
    DOI: 10.1016/j.jpubeco.2025.105447
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    2. Hundsdoerfer, Jochen & Löwe, Maren, 2026. "How do value added taxes affect wages and labor?," arqus Discussion Papers in Quantitative Tax Research 311, arqus - Arbeitskreis Quantitative Steuerlehre.

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    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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