Value-added tax systems across the world are afﬂicted with size-dependent regulations.The beneﬁt of such regulations to the tax authority is unclear. In this paper, we use an administrative dataset from the state of Delhi in India to ﬁrst show that a policy which mandated different frequencies of ﬁling based on self-reported turnover resulted in bunching of ﬁrms below the thresholds at all levels. Using the subsequent change in these reporting policies, we provide evidence that such sharp bunching indeed occurs due to the VAT reporting frequency thresholds. We document that such bunching partly occurs due to turnover shifting and underreporting, provide evidence that the observed bunching has no growth consequences for the bunching ﬁrms – and ﬁnd that bunching occurs to similar degree across industries. Second, we calculate the VAT revenue losses due to such bunching. Third, the subsequent withdrawal of the policy allows us to show that in a regime with size-dependent reporting requirements, more frequent reporting is not associated with greater VAT collection. Finally, according to our back of the envelope welfare analysis, the sized-based ﬁling policy is welfare improving if a welfare-maximizing government’s objective function assigns important weights to small- and medium-sized enterprises.
Authors: Jan Luksic, European Commission, and Shekhar Mittal, University of California