VAT incidence in real VAT systems

Giacomo Brusco and Tejaswi Velayudhan

Journal of Public Economics, 2025, vol. 249, issue C

Abstract: This paper studies the price impacts of Value Added Tax (VAT) in the presence of size-based exemptions, which are set relatively high in the firm-size distribution in developing contexts. In addition to the standard determinants of tax incidence, we show that pass-through of VAT to consumer prices will depend on the substitutability of registered and unregistered varieties of taxed goods, on pass-through at upstream stages, and on the extent of segregation between registered and unregistered supply chains. The exemption can also distort the quality of goods produced. We show that these mechanisms are empirically important in the context of a VAT in India, where those who consume at unregistered firms nevertheless bear some of the tax burden.

JEL-codes: H22 O17 O23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:249:y:2025:i:c:s0047272725001458

DOI: 10.1016/j.jpubeco.2025.105447

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