Taxation and Supplier Networks: Evidence from India

Lucie Gadenne and Tushar K. Nandi
Additional contact information
Tushar K. Nandi: Indian Institute of Science Education and Research (IISER)

No 947, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: Do tax systems distort firm-to-firm trade? This paper considers the effect of tax policy on supply chains in a large developing economy, the state of West Bengal in India. Using administrative panel data on firms, including transaction data for 4.8 million supplier clientpairs, we first document substantial segmentation of supply chains between firms paying Value-Added Taxes (VAT) and non-VAT-paying firms. We then develop a model of firms’ sourcing and tax decisions within supply chains to understand the mechanisms through which tax policy interacts with supply networks. The model predicts partial segmentation in equilibrium because of both supply-chain distortions (taxes affect how much firms trade with each other) and strategic complementarities in firms’ decision to pay VAT. Finally, we test the model’s predictions using variations over time within firm and within supplier-client pairs. We find that the tax system distorts firms’ sourcing decisions, and evidence of strategic complementarities in firms’ tax choices within supplier networks. A hypothetical reform exempting all firm-to-firm transactions from the VAT would lead to growth of small- and medium-sized firms at the cost of a smalldecrease in tax revenues.

JEL-codes: H25 L14 O23 (search for similar items in EconPapers)
Date: 2023-03-01
New Economics Papers: this item is included in nep-acc, nep-bec, nep-ind, nep-pbe and nep-pub
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2023/wp947.pdf (application/pdf)

Related works:
Working Paper: Taxation and Supplier Networks: Evidence from India (2019)
Working Paper: Taxation and Supplier Networks: Evidence from India (2019)
Working Paper: Taxation and Supplier Networks: Evidence from India (2019)
Working Paper: Taxation and Supplier Networks: Evidence from India (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:947

Access Statistics for this paper

More papers in Working Papers from Queen Mary University of London, School of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Nicholas Owen ( this e-mail address is bad, please contact ).