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Does VAT have higher tax compliance than a turnover tax? Evidence from China

Author

Listed:
  • Jianjun Li

    (Southwestern University of Finance and Economics)

  • Xuan Wang

    (University of Michigan)

Abstract

We study the tax compliance effects of value-added tax (VAT) by exploiting the reform replacing business tax (BT) with VAT in China beginning in 2012. We find that replacing the BT with VAT significantly increases reported sales and reported cost for treated firms, and the impact is much stronger among business-to-business (B2B) transactions than business-to-consumer (B2C) transactions. Buyers in B2B transactions have stronger incentives to claim invoices to credit their output VAT and reduce their tax liabilities. In B2C transactions, individual consumers do not need VAT credit, so the reform has little impact. Moreover, firms report higher costs after the reform to offset their tax liability. The results indicate that VAT has higher tax compliance than a turnover tax and the VAT system has self-enforcing properties in B2B transactions.

Suggested Citation

  • Jianjun Li & Xuan Wang, 2020. "Does VAT have higher tax compliance than a turnover tax? Evidence from China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(2), pages 280-311, April.
    • Handle: RePEc:kap:itaxpf:v:27:y:2020:i:2:d:10.1007_s10797-019-09567-4
    DOI: 10.1007/s10797-019-09567-4
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    Cited by:

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    3. Kong, Dongmin & Xiong, Mengxu & Qin, Ni, 2022. "Business Tax reform and CSR engagement: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 82(C).
    4. Sixia Chen & Yuan Fang & Shengfeng Lu & Haotian Zhang, 2024. "Tackle spurious invoices challenges to VAT compliance: a quasi-experiment of input VAT deduction reform in China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(5), pages 1342-1387, October.
    5. Kowsar Yousefi & Mohammad Vesal, 2023. "The Double Dividend of a Joint Tariff and VAT Reform: Evidence from Iran," The World Bank Economic Review, World Bank, vol. 37(2), pages 331-349.
    6. He, Yuhan & Yi, Yang, 2023. "Digitalization of tax administration and corporate performance: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 90(C).
    7. Peng, Fei & Zhou, Shibiao & Zhou, Peng, 2023. "Local government fiscal stress and corporate risk-taking: Evidence from a quasi-natural experiment in China," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1677-1695.
    8. Athiphat Muthitacharoen & Wonma Wanichthaworn & Trongwut Burong, 2021. "VAT threshold and small business behavior: evidence from Thai tax returns," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1242-1275, October.
    9. Yu, Jinliang & Qi, Yu, 2022. "BT-to-VAT reform and firm productivity: Evidence from a quasi-experiment in China," China Economic Review, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Value-added tax; Tax compliance; Business tax; China;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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