VAT credit refunds and firm productivity: Evidence from China's VAT reform

Lihua Liu, Lele Cao, Yuqiang Cao, Meiting Lu and Yaowen Shan

International Review of Financial Analysis, 2024, vol. 93, issue C

Abstract: This study exploits the implementation of the value-added tax (VAT) credit refund policy in China as an exogenous shock to examine the policy's impact on firm productivity. We find that pilot firms' total factor productivity increases significantly following the implementation of the tax reform due to higher operating cash flow, increased innovation incentives, and improved human capital investment in highly educated labor. Further tests show that the effect of the VAT credit refund policy is more pronounced among large firms, manufacturing firms, firms with strong financing constraints, and those located in regions with low levels of marketization and financial development. Our results provide novel evidence regarding the economic benefits of the VAT credit refund policy, and highlight its role in fostering firm productivity and economic growth.

Keywords: Value-added tax; Credit refunds; Firm productivity; China (search for similar items in EconPapers)
JEL-codes: H11 H25 H30 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:93:y:2024:i:c:s1057521924001030

DOI: 10.1016/j.irfa.2024.103171

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