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Taxation and Supplier Networks : Evidence from India

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  • Gadenne, Lucie

    (University of Warwick, Institute for Fiscal Studies and CEPR)

  • Nandi, Tushar K.

    (CTRPFP, Center for Studies in Social Sciences)

  • Rathelot, Roland

    (University of Warwick and CEPR)

Abstract

Do tax systems distort firm-to-firm trade? This paper considers the effect of tax policy on supplier networks in a large developing economy, the state of West Bengal in India. Using administrative panel data on firms, including transaction data for 4.8 million supplier-client pairs, we first document substantial segmentation of supply chains between firms paying Value-Added Taxes (VAT) and non-VAT-paying firms. We then develop a model of firms’ sourcing and tax decisions within supply chains to understand the mechanisms through which tax policy interacts with supply networks. The model predicts partial segmentation in equilibrium because of both supply-chain distortions (taxes affect how much firms trade with each other) and strategic complementarities in firms’ tax choices. Finally, we test the model’s predictions using variations over time within-firm and within supplier-client pairs. We find that the tax system distorts firms’ sourcing decisions, and suggestive evidence of strategic complementarities in firms’ tax choices within supplier networks

Suggested Citation

  • Gadenne, Lucie & Nandi, Tushar K. & Rathelot, Roland, 2019. "Taxation and Supplier Networks : Evidence from India," The Warwick Economics Research Paper Series (TWERPS) 1208, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:1208
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    References listed on IDEAS

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    Cited by:

    1. David Atkin & Amit Khandelwal, 2019. "How Distortions Alter the Impacts of International Trade in Developing Countries," NBER Working Papers 26230, National Bureau of Economic Research, Inc.
    2. Peter Morrow & Michael Smart & Artur Swistak, 2019. "VAT Compliance, Trade, and Institutions," CESifo Working Paper Series 7780, CESifo.

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