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

Author

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  • Sacchidananda Mukherjee

    (National Institute of Public Finance and Policy (NIPFP), Special Institutional Area)

  • Shivani Badola

    (National Institute of Public Finance and Policy (NIPFP), Special Institutional Area)

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.

Suggested Citation

  • Sacchidananda Mukherjee & Shivani Badola, 2022. "Estimation of VAT compliance costs of unincorporated enterprises in India: unit-level analysis," Indian Economic Review, Springer, vol. 57(2), pages 421-441, December.
    • Handle: RePEc:spr:inecre:v:57:y:2022:i:2:d:10.1007_s41775-022-00139-8
    DOI: 10.1007/s41775-022-00139-8
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    References listed on IDEAS

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    1. Cedric Sandford, 1981. "Book Review: Costs and Benefits of VAT," Fiscal Studies, Institute for Fiscal Studies, vol. 2(2), pages 61-62, July.
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    More about this item

    Keywords

    Value added tax; Compliance cost; Compliance burden; Unincorporated enterprises; India;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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