Impact of Third-party Reporting on Corporate Tax Evasion: Evidence from Indian Tax Records

Abstract

India recently adopted a nationwide tax reform, the Goods and Services Tax (GST), enhancing third-party reporting and enforcement. This study examines how the GST affected business tax compliance. After the reform, firms reported higher revenues and costs, which can be attributed to increased efficiency and improved tax compliance. To isolate the impact of the GST on tax compliance, we focus on financial statement fraud. We find that while the GST likely reduced revenue underreporting, it increased evasion through overreporting of non-verifiable costs. We present a novel approach to detect cost overreporting that exploits variations in firms' non-verifiable input cost shares around tax exemption thresholds and use it to show that informal labor-intensive enterprises overreported wage bills after the regime shift, partially offsetting the tax compliance advantages of third-party reporting. We develop a structural model consistent with these empirical patterns and use it to study several ways of increasing tax revenues.

Keywords: Corporate tax evasion, third-party information

JEL Classification: D22, H25, H26