Value Added Tax and Informality

What is it about?

Unincorporated enterprises often bypass formal regulations in general and taxation in particular. Bringing unincorporated enterprises under the taxation system is a challenge often faced by tax administrators, and it is in this regard that the present study explores the factors which influence the decision of unincorporated enterprises to register with the state value added tax (VAT)/sales tax authority across states in India. This analysis is limited to the decision regarding registration. It is not necessary that enterprises that are registered pay taxes and/or file returns—however, the process of registration does provide some information to the tax department for follow ups. The study throws up some interesting results for policymakers and tax administrators.

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Why is it important?

The first step towards participation in most tax regimes is registration in the regime. The existence of an informal sector in most economies, perhaps larger informal economies in developing countries, where the agents do not participate in the tax regime, raises concerns for tax departments. From the taxpayers’ perspective, being in the tax regime would be associated with certain costs and certain benefits. If the costs exceed the benefits, it is expected that the taxpayer would choose to remain outside the realm of taxation.

Perspectives