Monday, September 18th 2017 – 13:00 – 14:00
Maison des Sciences Économiques, Room S/3
Maison des Sciences Économiques, 106-112 bd de l’Hôpital, 75013 Paris, Métro 5 Campo Formio, bus 57, 67, 27, 83 ou 47
with Marie Gadenne (Warwick) and Tushar Nandi (CSSS Calcutta)
How do tax systems in developing countries affect the efficiency of supply chains? West-Bengal (India) has a dual-tax system: firms whose size are below a threshold can choose between a VAT and a turnover tax. Firms that opt for the turnover scheme cannot issue tax receipts for their sales, so VAT-paying firms cannot deduct purchases from firms in the turnover scheme from their tax liability. All else equal, VAT-paying firms will prefer trading with VAT-paying firms than with firms in the turnover scheme.
We develop a theoretical framework to understand how firms’ production, choice of tax status (turnover vs VAT) and trading (choice of suppliers and clients) decisions are affected by tax policy. We then use administrative tax data on the nearly 200,000 firms paying taxes (in both the VAT or turnover schemes) in West Bengal over the period 2010 to 2015. On top of firms’ balance sheet, we have data on 4 billion firm-to-firm transactions which we use to characterize the production network in the economy.
We find considerable heterogeneity in firms’ tax status choices: (i) there is substantial bunching below the turnover tax threshold, (ii) 70% of firms eligible to both regimes choose to pay the VAT. Our evidence suggests that supply chain considerations drive this heterogeneity: we find that firms that enter our data in any given year are more likely to choose to enter the VAT scheme (as opposed to the turnover scheme) when their potential trading partners are in the VAT scheme.