Effect of VAT Adoption on Manufacturing Firms in Ethiopia

Abstract

To remedy their low fiscal capacity problem, many developing countries adopted value-added taxation because they believe it will raise tax revenue and improve the production efficiency of firms. In this paper, we study the impact of the adoption of the value-added tax (VAT) on firms by analyzing the introduction of VAT in Ethiopia in 2003 using panel data of manufacturing firms (1996-2009). By law, a firm is required to register for VAT if it is big (its revenue is higher than 500,000 Birr); otherwise, the firm is small and faces a much lower turnover tax rate. Using a difference in differences strategy with big firms as a treatment and small firms as control, and excluding firms that might potentially bunch around the threshold, we find taxes paid, reported revenue, taxes paid out of revenue, value-added, and raw materials use increase for big firms. However, the share of inputs in revenue fell suggesting VAT increased revenue efficiency by not production efficiency.

Evaluating the Influence of Value-Added Tax Policy Changes on the Liquidity and Performance of Banking Sector Stocks: An Event Study Analysis

“…Yet, they did not extend their analysis to the stock market's response to such fiscal policies. Similarly, studies focusing on tax policies often concentrate on direct taxation's influence on investment decisions and corporate finance strategies [9][10][11][12][13][14][15][16], leaving the domain of indirect taxes, such as VAT, less explored in the context of stock market performance.…”