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The Role of Withholding in the Self-Enforcement of a Value-Added Tax: Evidence from Pakistan

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  • Mazhar Waseem

    (University of Manchester)

Abstract

I leverage the staggered rollout of VAT in Pakistan to document the role of withholding mechanism in the self-enforcement of a VAT. Focusing on firms already in the tax net, I see how their outcomes respond when the tax is extended upward to intermediates used by them. I find that the upward extension of VAT, which triggers the withholding mechanism, causes an immediate and large (more than 40 log points) surge in sales reported by firms. The evolution of bunching above the zero-liability point and of input costs reported by firms suggests that this large response is indeed driven by the withholding mechanism. I also explore the role of withholding in the extensive margin compliance choices of firms.

Suggested Citation

  • Mazhar Waseem, 2022. "The Role of Withholding in the Self-Enforcement of a Value-Added Tax: Evidence from Pakistan," The Review of Economics and Statistics, MIT Press, vol. 104(2), pages 336-354, May.
    • Handle: RePEc:tpr:restat:v:104:y:2022:i:2:p:336-354
    DOI: 10.1162/rest_a_00959
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    Cited by:

    1. Bagchi, Sutirtha, 2022. "Withholding matters: The impact of Act 32 on compliance with the earned income tax," Economics Letters, Elsevier, vol. 219(C).
    2. Waseem, Mazhar, 2023. "Overclaimed refunds, undeclared sales, and invoice mills: Nature and extent of noncompliance in a value-added tax," Journal of Public Economics, Elsevier, vol. 218(C).
    3. Dario Tortarolo & Pablo Garriga, 2022. "Firms as tax collectors," IFS Working Papers W22/44, Institute for Fiscal Studies.
    4. Thiess Buettner & Annalisa Tassi, 2023. "VAT fraud and reverse charge: empirical evidence from VAT return data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 849-878, June.
    5. Sutirtha Bagchi & Libor Dušek, 2023. "Tax Withholding and the Size of Government," Villanova School of Business Department of Economics and Statistics Working Paper Series 59, Villanova School of Business Department of Economics and Statistics.
    6. Reaños, Miguel Tovar & De Bruin, Kelly & Meier, David & Yakut, Aykut Mert, 2022. "Economic and Distributional Impacts of turning the Value-Added Tax into a Carbon Tax," Papers WP739, Economic and Social Research Institute (ESRI).
    7. Sutirtha Bagchi, 2022. "The Effects of Introducing Withholding on Tax Compliance: Evidence from Pennsylvania’s Local Earned Income Tax," Villanova School of Business Department of Economics and Statistics Working Paper Series 58, Villanova School of Business Department of Economics and Statistics.

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