Template-Type: ReDIF-Paper 1.0
Author-Name: Abhay Aneja
Author-Name-First: Abhay
Author-Name-Last: Aneja
Author-Email: aneja@berkeley.edu
Author-Workplace-Name: UC Berkeley School of Law
Author-Name: Nirupama Kulkarni
Author-Name-First: Nirupama
Author-Name-Last: Kulkarni
Author-Email: nirupama.kulkarni@gmail.com
Author-Workplace-Name: CAFRAL
Author-Name: S.K. Ritadhi
Author-Name-First: S.K.
Author-Name-Last: Ritadhi
Author-Email: sk.ritadhi@ashoka.edu.in
Author-Workplace-Name: Department of Economics, Ashoka University
Title: Consumption Tax Reform and the Real Economy: Evidence from India’s Adoption of a Value-Added Tax
Abstract: We study the impact of a consumption tax reform on firm capital and productivity by examining India’s replacement of the sales tax with a value-added tax (VAT). Unlike the sales tax, the VAT allowed firms to offset their tax liability with VAT paid on capital inputs, effectively reducing the tax-related cost of capital. Exploiting the staggered adoption of the tax reform across Indian states, we show that VAT adoption increased firm capital by 3%. The effects are driven by financially-constrained firms – an important source of heterogeneity in a developing country context. We also document a corresponding improvement in the productivity of financially constrained firms. Our findings thus suggest that beyond revenue generation, consumption tax reforms can have the additional effect of stimulating investment and productivity in resource constrained environments.
length: 65
Creation-Date: 20210101
Revision-Date: 
Publication-Status: 
File-URL: https://dp.ashoka.edu.in/ash/wpaper/paper48_0.pdf
File-Format: Application/pdf 
Number: 48
Keywords: capital misallocation
Keywords: consumption tax reform
Keywords: financial constraints
Keywords: Value-added taxes
Handle: RePEc:ash:wpaper:48