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Consumption Tax Reform and the Real Economy: Evidence from India’s Adoption of a Value-Added Tax

Author

Listed:
  • S. K. Ritadhi

    (UC Berkeley School of Law)

  • Nirupama Kulkarni

    (CAFRAL (Centre for Advanced Financial Research and Learning))

  • Abhay Aneja

    (Ashoka University)

Abstract

We study the impact of a consumption tax reform on firm capital and productivity by examining India's replacement of the sales tax with a value‐added tax (VAT). Unlike the sales tax, the VAT allowed firms to offset their tax liability with VAT paid on capital inputs, effectively reducing the tax‐related cost of capital. Exploiting the staggered adoption of the tax reform across Indian states, we show that VAT adoption increased firm capital by 3%. The effects are driven by financially‐constrained firms – an important source of heterogeneity in a developing country context. We also document a corresponding improvement in the productivity of financially‐constrained firms. Our findings thus suggest that beyond revenue generation, consumption tax reforms can have the additional effect of stimulating investment and productivity in resource‐constrained environments.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • S. K. Ritadhi & Nirupama Kulkarni & Abhay Aneja, 2021. "Consumption Tax Reform and the Real Economy: Evidence from India’s Adoption of a Value-Added Tax," Working Papers 022289, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022289
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    File URL: https://www.cafral.org.in/sfControl/content/Speech/78202125727PMVAT.pdf
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    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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