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.
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Notes
Also see Vishnuhadevi (2021).
Cash flow benefits arise due to the difference between the time when the taxes are collected by taxpayers and the time when they are actually handed over or deposited to the tax authorities (Tran-Nam et al., 2000).
Tax deductibility benefits arise when taxpayers deduct some amount paid for complying with the tax regime from their taxable income. For example, in Australia, personal (individual non-business) taxpayers can deduct the costs of paid tax advisers and tax related incidental income from their taxable income (Tran-Nam et al., 2000).
Managerial benefits include the benefits derived by the taxpayers (particularly business taxpayers) with the proper record keeping of the accounts which helps them in getting managerial accounting information for business and decision making purposes (Tran-Nam et al., 2000).
VAT system of each country is assessed (rated) against 27 indicators and a normalised weighted score is assigned for each country. Score obtained by each country is converted into a 'compliance burden index' by applying 10-point scale, where index rating 1 reflects a VAT system with very low/ minimal compliance burden while rating 10 reflects VAT system with very significant compliance burden (Highfield et al., 2019).
These are predefined input costs captured by the unit-level data and we cannot segregate the costs of architecture and engineering out of total costs of “Audit, advertising, accounting, book keeping, architecture, engineering, photocopying”.
Only 1.43 per cent of the enterprises (after applying all restrictions) with annual turnover below the threshold are registered (Table A2 in Appendix).
In Table 2 we present description of the variable formal credit.
Please note that these are service charges paid to other businesses and it does not include labour costs associated with accounting, book keeping services, etc.
Annual Operating cost also includes labour cost (i.e. total emoluments paid to workers).
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Mukherjee, S., Badola, S. Estimation of VAT compliance costs of unincorporated enterprises in India: unit-level analysis. Ind. Econ. Rev. 57, 421–441 (2022). https://doi.org/10.1007/s41775-022-00139-8
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DOI: https://doi.org/10.1007/s41775-022-00139-8