Estimation of VAT compliance costs of unincorporated enterprises in India: unit-level analysis

Sacchidananda Mukherjee and Shivani Badola ()
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Shivani Badola: National Institute of Public Finance and Policy (NIPFP), Special Institutional Area

Indian Economic Review, 2022, vol. 57, issue 2, No 9, 441 pages

Abstract: Abstract Compliance cost is often referred as “hidden cost of taxation” and acts as disincentives for enterprises to comply with the tax regime. In the present paper, we develop a methodology to measure VAT/Sales Tax compliance costs of unincorporated enterprises in India based on unit-level data of the National Sample Survey Office (NSSO)’s 73rd round survey (July 2015–June 2016). Earlier studies have relied on primary survey to estimate tax compliance costs and suffering from low response rate. To overcome this problem, we have relied on secondary survey. We have identified and extracted component-wise costs associated with compliance activities of unincorporated enterprises and apply difference approach in instrumental variables two-stage least square framework to estimate tax compliance costs of VAT-registered enterprises. Coverage of compliance cost in the present paper is partial as the NSSO’s survey does not capture all information related to compliance activities. The estimated average compliance cost is 4.35% of average annual total operating cost and 3.87% of average annual turnover of sample enterprises. We observe regressiveness in the estimated compliance cost with reference to average annual turnover and progressiveness in average market value of total asset.

Keywords: Value added tax; Compliance cost; Compliance burden; Unincorporated enterprises; India (search for similar items in EconPapers)
JEL-codes: C36 H20 H71 K34 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s41775-022-00139-8

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