Bank of Lithuania
November 24 10:30 - 12:00

Presenter: Giacomo Brusco (University of Tübingen)

Title: Does the Informal Sector Escape the VAT?

Abstract: Value Added Tax (VAT) systems commonly have a size-based registration exemption. Low-income countries tend to set this exemption threshold relatively higher in the firm-size distribution than high-income countries, making it highly policy-relevant in these contexts. This paper theoretically and empirically investigates the impact of VAT on prices of unregistered, or ``informal'', firms in a large developing country -- India. We find that while the VAT is fully passed through to consumers at registered firms, prices among unregistered firms do not change. Prices at unregistered firms are also relatively unaffected by taxes at the input stage, reflecting segregation in supply chains by registration status. However, we show the VAT affects the average quality of goods supplied by unregistered firms -- evidence that a registration threshold distorts the quality of goods supplied in equilibrium.

Last update: 20-11-2023