Value Added Tax Evasion, Auditing and Transactions Matching

Rutgers University WP 96-07

38 Pages Posted: 12 Nov 1996

See all articles by Ira N. Gang

Ira N. Gang

Rutgers University - Economics Department

Arindam Das-Gupta

Goa Institute of Management

Date Written: July 1996

Abstract

This paper extends the standard theoretical model of tax enforcement by allowing for the cross-matching of transactions in addition to the auditing of taxpayers. For the Value Added Tax (VAT) the matching of purchase and sales invoices is an important enforcement technique. The paper examines the impact of such enforcement on the revenue effectiveness and efficiency consequences of the VAT. Transactions matching is shown to have very different effects from auditing: Even when auditing alone is unable to induce non-zero taxpayer reports, and regardless of the expected success rate in auditing of the tax administration, sufficiently intensive cross-matching can induce truthful reporting. On the other hand, matching leads to distorted purchase and sales transactions. It can also distort input use and output decisions even if auditing alone has no adverse effects. In the model, conditions under which the VAT leaves input prices undistorted are found and the content of the often made claim, that a VAT is self-enforcing, is explored. The ability of the tax administration to enforce compliance with the VAT is shown to be sensitive to the knowledge that the tax administration has about the production technology.

JEL Classification: H26, H25, H20

Suggested Citation

Gang, Ira N. and Das-Gupta, Arindam, Value Added Tax Evasion, Auditing and Transactions Matching (July 1996). Rutgers University WP 96-07, Available at SSRN: https://ssrn.com/abstract=15026 or http://dx.doi.org/10.2139/ssrn.15026

Ira N. Gang (Contact Author)

Rutgers University - Economics Department ( email )

75 Hamilton Street
ECONOMICS, New Jersey Hall, Rutgers University
New Brunswick, NJ 08901-1248
United States
732-932-7363 (Phone)
732-932-7416 (Fax)

HOME PAGE: http://econweb.rutgers.edu/gang/research

Arindam Das-Gupta

Goa Institute of Management ( email )

Ribandar, Goa 403006
India
91-832-2490300 (Phone)

HOME PAGE: http://www.gim.ac.in