| Abstract: |
I leverage a Pakistani tax reform that cuts the tax rate on the supply chains
of five major industries of the country from 15% to 0% to cast light on the
extent of, and mechanisms driving, VAT noncompliance in a representative
emerging economy. I find that firms overclaim refunds by 22% and underreport
domestic B2C sales by 43.5%. Together, this implies an evasion rate of 77% in
the treated industries and 38% in the population. I explore the role of three
mechanisms (1) the destination principle, (2) the last-mile problem, and (3)
invoice mills in driving this noncompliance. |