Tackle spurious invoices challenges to VAT compliance: a quasi-experiment of input VAT deduction reform in China

Sixia Chen (), Yuan Fang (), Shengfeng Lu () and Haotian Zhang
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Sixia Chen: Zhongnan University of Economics and Law
Yuan Fang: Southwestern University of Finance and Economics
Shengfeng Lu: Wuhan University
Haotian Zhang: Wuhan University

International Tax and Public Finance, 2024, vol. 31, issue 5, No 7, 1342-1387

Abstract: Abstract When upstream suppliers are VAT-exempted, overclaiming by fictional invoices becomes easier. This paper examines the effect of the presumed input VAT deduction reform on VAT evasion among VAT-exempted transactions in China. In the reform, firms are required to claim the presumed input refund of VAT based on downstream sales volume instead of on purchasing cost recorded on self-issued purchased invoices. We find that the reform reduced firms’ VAT evasion since taxpayers have little incentive to use spurious invoices. Furthermore, the reform demonstrated more pronounced policy effects when taxpayers are low in tax-compliance and local economy contains a higher share of tax-noncompliant firms with poor accounting records. Results survive a battery of robustness checks as well as treatment effect heterogeneity. The presumed input VAT method would be a complementary tax enforcement tool to avoid VAT evasion in low tax capacity and high-informality settings under the context of credit-invoice VAT collection system.

Keywords: Self-restraint; Tax noncompliance; Information deterrence (search for similar items in EconPapers)
JEL-codes: D22 H26 H32 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10797-023-09805-w

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