Impact of the GST on Corporate Tax Evasion: Evidence from Indian Tax Records

In July 2017, India replaced its fragmented indirect tax structure with a nationwide Goods and Services Tax (GST). The change in the tax regime induced an increase in third-party reporting and introduced an enforcement notch. In this paper, we study the impact of the GST on tax compliance by businesses. We document that firms reported higher revenues and costs in response to the tax change. However, these effects can be attributed to both increased efficiency and greater tax compliance. To unpack the impact of the regime change on evasion, we focus on financial statement fraud. We find that while the GST reduced revenue underreporting, it also prompted evasion on other (non-verifiable) margins. We propose a novel technique to detect cost overreporting that exploits variations in the composition of firm inputs around tax exemption thresholds. We use our proposed method to show that firms overreported their wage bills in response to the regime change. We develop a structural model that is consistent with these empirical patterns and use it to study several ways of increasing tax revenues.