The Role of Withholding in the Self-Enforcement of a Value-Added Tax: Evidence from Pakistan

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Abstract

I leverage the staggered roll out of VAT in Pakistan to document the role of withholding mechanism in the self-enforcement of a VAT. Focusing on firms already in the tax net, I see how their outcomes respond when the tax is extended upward to intermediates used by them. I find that the upward extension of VAT, which triggers the withholding mechanism, causes an immediate and large (more than 40 log-points) surge in sales reported by firms. The evolution of bunching above the zero-liability point and of input costs reported by firms suggest that this large response is indeed driven by the withholding mechanism. I also explore the role of withholding in the extensive margin compliance choices of firms.

Bibliographical metadata

Original languageEnglish
Pages (from-to)1-44
Number of pages44
JournalReview of Economics and Statistics
Publication statusAccepted/In press - 27 May 2020

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