Making VAT Production Efficient: Direct and Spillover Effects of Immediate Refund Reform in China

• In Event: Consumption Taxes in Developing Countries

Abstract

This study investigates China's recent Value-Added Tax (VAT) immediate refund reform aimed at improving production efficiency. Utilizing detailed firm-level tax return data from 2009 to 2020, we explore how allowing immediate refunds of excess VAT input credit affects firm liquidity and investment behavior directly, and how these impacts propagate through supply chains. Our findings show that firms previously burdened by persistent excess VAT input credits experienced significant improvements in liquidity post-reform, prompting increased R&D expenditures. Moreover, we identify spillover effects along supply chains, contingent upon supplier bargaining power, whereby suppliers with greater bargaining power benefited indirectly through reduced trade credit burdens and increased R&D investment.

Authors

• Xuan Wang, Peking University

• Jing Xing, Shanghai Jiao Tong University