Enhancing Revenue Collection Capacity through Automation: Evidence from a VAT

• In Event: Consumption Taxes in Developing Countries

Abstract

Can technology and automation augment state capacity in tax enforcement? We investigate this question in the context of curbing fake invoices in a Value Added Tax, the Indian Goods and Services Tax (GST). A simple change on an e-filing portal made it mandatory for firms to remit taxes before they could provide input tax credits to their buyers. We find that firms targeted by this low-cost enforcement respond by reducing the provision of likely fraudulent tax credits to their trading partners. Partner firms that purchased from these targeted firms permanently increased their net tax payments, with only a small decrease in sales. Overall, the policy change was effective in increasing tax revenue: back-of-the-envelope calculations suggest an annual revenue increase for the tax department of over INR 3 billion or 0.7 percent of total GST revenue.

Authors

• Vedant Vohra, University of California San Diego

• Tejaswi Velayudhan, University of California Irvine

• Bhanu Gupta, Ashoka University