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Overclaimed Refunds, Undeclared Sales, and Invoice Mills: Nature and Extent of Noncompliance in a Value-Added Tax

Mazhar Waseem

Economics Discussion Paper Series from Economics, The University of Manchester

Abstract: I leverage a Pakistani tax reform that cuts the tax rate on the supply chains of five major industries of the country from 15% to 0% to estimate the extent of VAT noncompliance in the country. I find that at the baseline the treated industries overclaimed refunds by nearly 22% and underreported domestic B2C sales by nearly 43.5%. Together, this caused a total VAT revenue loss of PKR 38 billion, which translates into 11.5% (77% of the statutory rate of 15%) of the true taxable sales of these industries. I also explore the role of invoice mills in facilitating this noncompliance. Invoice mills are firms that engage in no real business activity and exist solely to trade in VAT invoices. I find that the amount of excess refund claimed by exporters nearly equals the amount of input tax involved on invoices issued to them by invoice mills, suggesting that almost all of revenue loss on export refunds takes place through the medium of invoice mills.

JEL-codes: H25 H26 H32 (search for similar items in EconPapers)
Date: 2019
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