Value-Addes Tax and Shadow Economy: the Role of Input-Output Linkages (revision of CentER Discussion Paper 2013-036)

Mohammad Hoseini

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Abstract

Under the VAT, formal traders report their purchases to the administration for a
deduction in their VAT bill. This paper models this third-party reporting feature of the VAT in an input-output economy and quantifies it among different activities using a forward linkages index. The administration can reduce the size of shadow economy by reallocating visiting audits to backwardly linked activities and cross-checking VAT payments with input credit claims in forwardly linked activities. Empirical evidence from Indian service sector justifies the assumptions and suggests a significant increase in the tax compliance of forwardly linked activities following VAT adoption in 2003.
Original languageEnglish
Place of PublicationTilburg
PublisherEconomics
Number of pages50
Volume2015-058
Publication statusPublished - 14 Dec 2015

Publication series

NameCentER Discussion Paper
Volume2015-058

Keywords

  • Value-added tax
  • Informality
  • Tax enforcement
  • Linkage analysis

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