My research focus is Public Finance, Public Economics, Applied Microeconomics and Development Economics. I analyze Tax Policy and Administration, using large administrative data sets. The presentations and preliminary drafts for S. No. 3 and 4 are available on request.
Please download my Research Statement for details.
I test the efficacy of VAT’s in-built third-party information trail, together with electronic filing, to deter tax evasion in a low state capacity environment. Using a reform which utilizes information beyond the VAT trail and authorizes a computerized risk analysis system to accept or reject tax credits in real time, my difference-in-differences estimates show that claims declined by 50%. Based on firm heterogeneity, the response ranges from 30-90%. Approximately 10% of treated firms were fake, created for missing trader fraud. The lower bound estimate of increase in net VAT collection at the country level is 10%. I find that traditional VAT enforcement mechanisms of crossmatching, audit and recovery fail to deter evasion in developing countries but a risk-based real-time enforcement system is effective.
We exploit a program of randomized audits covering the entire population of VAT filers from Pakistan to study how much evasion audit detects and how much evasion it deters by changing behavior. We document substantial evasion at the baseline: almost one-third of firms engage in tax evasion, and conditional on some evasion, the average evasion rate exceeds 40 percent. We find remarkable heterogeneity in evasion by firm size with the evaded amount exceeding the reported liability in the bottom three quartiles but is merely 7 percent in the top. Despite detecting substantial liabilities, audit does not deter tax evasion. Examining more than ten outcomes, we detect no effect of audit on proximate or distant behavior. We offer an explanation of the detection-without-deterrence result and discuss its optimal policy implications.
Many developing countries revised their high import tariff regimes in last three decades and replaced it with value added tax (VAT). If VAT sufficiently transfers tax burden to informal sector, it will increase welfare (Keen 2008), otherwise VAT will decrease welfare (Emran and Stiglitz 2005). I utilize kinks produced by minimum value addition thresholds to estimate evasion of VAT post-importation. I use an administrative dataset for the universe of monthly VAT returns filed in Pakistan for tax years 2009 to 2016 by firms exclusively engaged in imports. I estimate an average evasion rate of nearly 50%. Using changes in thresholds over years, I provide evidence that this minimum tax collection is the best-case scenario for revenue efficiency. The firms show strong bunching at or below threshold with about 40-60% of the firms showing bunching behavior. These results show that importers have strong tendency to misreport their sales which implies that VAT's impact on informal sector is only minimal absent these arbitrary thresholds. My results support the view that, absent deviations from standard, replacing high import tariffs with VAT would decrease welfare.
Tax administrations can often impose excessive compliance and regulation on large formal firms in developing countries such as withholding. I explore the impact of VAT’s withholding or reverse charge regime through a series of reforms. I find that sector specific reverse charge can decrease input tax claims by eighty percent (upper bound) without any impact on sales. For partial reverse charge, the firms show no change in behaviour but bear excessive compliance costs and liquidity issues arising from excess carry forwards.
An additional tax of 1% on turnover of supplies made to the unregistered sector was imposed in Pakistan. Put simply, a penalty was imposed on those making supplies to unregistered sector wherein the suppliers making supplies to unregistered entities were required to charge and remit an extra tax. On 1st July 2015, this penalty was enhanced from 1% to 2% and very recently starting 1st July 2018, it was increased to 3%. Importantly, an exemption is available to some categories of supplies from this tax. It implies that a simple difference-in-differences approach can be used to measure the effect of the reform. If the reform forced the firms making supplies to informal sector to switch to formal sector then, it implies that VAT is effective in forcing firms to switch to registered sector when the penalty is more direct and difficult to evade. If the reform didn’t show any effect then it strengthens the money machine argument. The reform also changes in intensity from 1% to 2% which can make the effect more interesting to study. I use a difference-in-differences design by using the firms who were unaffected by the reform as comparison group to study the effect of this treatment. Preliminary results show a fall in sales to unregistered sector when the rate is increased from 1% to 2%.